Gold Gathers Glitter

Ruskin8217;s hero may have gone overboard with his love for gold, but should you add the yellow metal to your portfolio? Prices hitting 455 per ounce still below the historical high of 850 per ounce in January 1980, during the gold bubble, when prices rose 63 per cent over three weeks has put the glitter back in gold. In Indian rupees, after touching a low of Rs 3,910 per 10 grams in December 1997, gold today trades at Rs 6,740 per 10 grams.

Why are gold prices rising?Reasons range from the dropping dollar, rising oil prices, inflation to a world in transition between the dollar, as the currency of the world, to the euro. But the one big reason for the 16-year high in gold prices has been the dropping dollar. Says Uma Shashikant, Vice President Knowledge Management, Prudential ICICI AMC: 8220;Dollar and gold are mirror images of one another. People switch between one and the other as stores of value. When the 8216;store of value8217; function of dollar goes down, central banks, hedge funds, very large investors shift to gold, causing prices to rise. That is what is happening now.8221;

Gold prices, it seems, will continue to rise see Expert Speak due to the expectation that George Bush8217;s first budget after his re-election will not cut the US deficit, not raise taxes or cut military expenditure, steps that would stop the dollar from losing value. Predicts Shashikant: 8220;The future outlook for the dollar is weak. Gold will go through the roof if the budget has nothing to control the US deficit8221;.

The role of gold in a portfolioPeriods of sharp volatility in gold prices are an exception rather than the norm. The trend line of gold prices is more stable than that of equity. The chart 8216;Gold vs Sensex8217; uses 1 November, 1999 as a base of 100 for both the Sensex and the price of 10 grams of gold in rupees. The chart shows that though both have shown an upward trend, gold prices have shown lesser capriciousness than equity prices. Gold also works to maintain purchasing power over time. Investors should not look at gold to make huge capital gains. Gold is notorious for not paying any income no interset or dividends flow out of gold, as they do from bonds and equity and is expensive to hold. Its role is more as an inflation hedge and portfolio diversifier. But remember that gold tends to drag returns over the long term, so don8217;t go overboard.

An average portfolio can have 8220;between 10 -15 per cent of the assets in gold higher, in case of a higher exposure to equities8221; says Sanjeev Agarwal, Managing Director of the World Gold Council, India. Mumbai based financial planner Gaurav Mashruwala says he has always recommended that his clients invest in gold, specially if the childrens8217; marriage is one of the financial goals. 8220;I usually ask them to buy gold on a particular day every year 8212;nbsp;preferably an auspicious day like Dassehra. This way they become disciplined,8221; he says.

Where to buy goldMost people buy gold from their jewellers. But for portfolio investing, experts recommend buying coins and bars. Says Agarwal: 8220;Bars or coins can be purchased from banks such as ICICI Bank, Corporation Bank and also from State Trading Corporation STC and MMTC.8221; If you must buy from the family jeweller, ask for the hallmarked gold to ensure purity of the metal.Buying jewellery as an investment will lose you money as making charges will not be part of the refund when you sell. Sophisticated trading instruments like gold mutual funds and Exchange Traded Funds are still some distance away in India. Watch out for them in the next few years.

Tax implications for goldThere is no income tax to be paid on holding gold since there is no income from it. But jewellery, coins and bars attract capital gains and wealth tax. To get around these taxes the SBI Gold Deposit is a tax-efficient instrument. The 0.5 per cent interest per year on the value of the gold deposit is tax free. There is no capital gains or wealth tax on the gold held in deposit with SBI either. Says Mashruwala: 8220;Once my clients have collected sufficient gold I make them invest in the SBI Gold Deposit8221;.

Remember in the months to come, the mania around gold will only increase. Leave gold speculation to traders and derivative market players, but use gold to hedge against inflation and diversify your portfolio in a systematic manner.

EXPERT SPEAK : SANJEEV AGARWAL
Managing Director of the World Gold Council, India

Why are gold prices rising?
Considering that gold has an inverse correlation with the dollar, the current spurt in global oil prices have led to an instable dollar, therefore the upward rise in the global prices of the yellow metal.
How long will this uptrend in commodities last?
The cycle period for commodity prices is longer than that of other asset classes and the upward movement in the commodity cycle has just begun barely a year and a half back and has some way to go. Within this category, gold is the most liquid of the lot and has the advantage that its price movements cannot be influenced by any government or interest group. This is because the price of gold is not linked with the performance of any economy or company, no single entity owns the stocks of gold that would impact the price behaviour.
Should a retail investor sell gold today?
Gold is an excellent alternative asset class to diversity portfolio risks on investments made in equities. Studies show that an investment portfolio should consist between 10 -15 per cent of the assets in gold higher, in case of a higher exposure to equities. Based on the asset allocation model parameters, if the investors holding in gold has increased beyond the risk reward ration that he is comfortable with, then the investor should sell part of the holdings up to the level of the model asset allocation and re-invest the same in the other asset which has declined in value. However if the investor holds very little gold as an investment portfolio in the form of bars and coins, then he should continue to buy at every dip in prices.
What should a buyer look for while buying gold, what is the safest way and place for buying gold?
If gold is being bought as an financial asset, then internationally the best way of investing is either through a gold savings account or gold bond certificate or even as an equity. In the Indian market, the best way of investment in gold as a financial asset is in the form of bars or coins. These can be purchased from banks such as ICICI Bank, Corporation Bank and also from State Trading Corporation STC and MMTC. Some of the leading jewellers have also started retailing bars as a form of investment at very competitive prices. Look for markings of gold refineries or insist on hallmarked gold, which is a certification of quality.
Does data suggest that gold is a good inflation hedge in India?
Over the centuries, gold has maintained its purchasing power. Analysis of prices in USA, Britain, Germany, France and Japan has shown that gold8217;s value may fluctuate in the short term, but consistently returns to its historic purchasing power parity with respect to other goods. In the Indian context, there has been no formal study that has been put in place to work out the inflation hedge benefit of gold because till recently, gold prices were artificially inflated in India compared to international gold prices because of import duties and quantitative restrictions. Further the wholesale price index consistence also does not completely reflect the basket of product and services that are consumed by middle class household in India. However, if an analysis is done on the gold prices, in India based on international gold prices and the same is mapped against the price movements of a range of goods and services, the inflation hedge benefit of gold will clearly stand out even in the Indian context.