• Money

For centuries, owning gold in India has been a tradition, irrespective of any religious, caste or class bias. Religious beliefs have also played a central role in determining the gold demand in India. Added to that, the demand for gold within a household unit has a direct co-relation with social occasions like weddings, birthdays and festivals.

Gold in India
Gold demand in India is a seasonal trend—the demand increases from June till end of the year due to festivals and marriage seasons. The major gold demand comes during Dusshera and Diwali around October-November. Demand for gold also increases during regional festivals like Durga Puja in the east, and in the south during Onam and Pongal festivals. All this stems from the fact that people in India assign gold purchase during auspicious days as a good omen.

In India, time-honored ancestral wisdom places a high premium on hoarding gold as an investment. The basis of this thinking comes from the age-old saying that “Gold will buy things when nothing else will”. This saying is independent of the architects of the Bretton-Woods system and yet the basis is the same: ‘Gold is the final hedge of value; the natural currency of the world.’

Gold as an investment vehicle
In the wake of last year’s global depression and economic slowdown, investors are looking at parking their investments safely. And gold is the obvious choice as a safe investment haven. Over the past year, when all the asset classes failed to perform, gold was the only investible asset that remained upbeat and delivered consistent returns. Gold is a hedge against the dollar and inflation. It has a very low correlation with other asset classes like equity and debt, thereby a good asset to diversify the overall portfolio.

Gold investment options
Across the world, several investment options are available for investors to put their money in the yellow metal like gold bars, gold coins and Gold ETF. Among the various gold investment options, ETF is far more convenient and a significantly reliable step in gold investing. Because, in case of gold bars and coins, there are few disadvantages like risk of theft, high cost of holding and questionable quality of gold while purchasing.

About Gold ETFs
Gold Exchange Traded Funds (ETFs) are open-ended mutual funds that are passively managed and they mirror the return of spot price of gold. Gold ETFs are listed and traded on stock exchanges just like other stocks. Gold ETF gives investor an advantage to participate in the gold bullion market without taking any physical delivery of gold. Gold ETFs provide returns which, before expenses, closely correspond to the returns provided by physical gold. Each unit is approximately equal to the price of one gram.

To invest in Gold ETF, one needs to have trading and demat account, as Gold ETF can be traded only in demat form. Gold ETF is classified under mutual fund and is taxed as per debt mutual fund taxation rules. Investors investing in Gold ETF are not liable to pay wealth tax.

How Gold ETF works
Gold ETF units are listed on the National Stock Exchange (NSE) and retail investors can buy and sell it just like any other security in the secondary market. Only authorized participants (APs) and large investors can create/redeem units directly with the fund house in exchange of the underlying and/or cash. The APs then further sell and buy these units in the secondary markets in small units. Retail investors have no direct access to the fund house.

Advantages of investing in Gold ETF:
* Diversification: Considered as an excellent diversification for your portfolio.
* Liquidity: Since it trades like a share, buying and selling happens quickly and therefore it is highly liquid.
* Safety: Gold ETF ensures that the custody and quality of gold is consistent, and in line with international best practices.
* Security: All transactions happen in electronic mode, so there is no risk in case of unforeseen circumstances.
* Lower cost: The expenses incurred in buying and selling Kotak Gold ETF are much lower then the cost incurred in buying, selling, storing and insuring physical gold.

Future gold prospects
The emergence of gold as a prominent investment asset in the current decade was largely an outcome of the liquidity glut at the beginning of the century. The ensuing credit crunch since mid-2007 only accelerated the investment process in the yellow metal, given the rising volatility in the market, and the uncertain economic scenario. As a policy response, the U.S. Federal Reserve and other global central banks have resorted, and continue to resort, to deficit financing and fiat-currency expansion to help stimulate their economies.

It is believed that the incidental impact of U.S.-fed balance sheet expansion (currency printing) initiative may see an oversupply of paper currency. This situation leads to inflation and currency devaluation in the economy. Given the fact that gold has historically been an inflation and value hedge against the U.S. dollar, there is anticipation that gold may see further rise in its price.

Furthermore, the increase in demand of gold has far outstripped the global gold production. This provides a structural momentum to growth of gold prices. For instance, of the world’s three biggest gold producers (China, South Africa and Australia), only China has managed to increase gold production in recent years. However, the increase in Chinese gold production has been matched by a corresponding rise in Chinese demand for gold.

According to the World Gold Council, higher mine development costs, potential supply disruptions, tougher safety regulations and depleting ore bodies could put a much higher floor under the gold price. Indeed the favorable supply-demand fundamentals mean that gold may be well supported with a floor of around $1,000/oz. Further, terrorism remains a risk, and the risk of a military confrontation between North Korea and South Korea also remains real. Geopolitical tensions in Russia and North Korea are all supporting upward price mobility in gold.

LAKSMHI IYER is Head (Fixed Income and Product), Kotak Mahindra Asset Management Company.

©Entrepreneur May 2010

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ETF, gold, invest