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WHY INVESTING IN GOLD IS A GOOD IDEA

WHY INVESTING IN GOLD IS A GOOD IDEA
July 06
14:12 2016

Holistically speaking, the common man remains unaware of the importance of gold investments in times of uncertainties like political crisis, geo-political tensions, unexpected movements in currencies, high inflationary periods etc. Most Indians probably start thinking about the value of gold when their daughters reach puberty. Parents are compelled to purchase gold for their daughter’s marriage with borrowed funds without considering the interest rates or the market price of gold. After the marriage most of these parents might be forced into selling at least a part of those gold ornaments at a discounted rate to repay the loans.

But there are many wise investors who have made a killing while investing in gold during uncertainties. Big players usually invest gold in kilograms or in gold bars with 999.9 purity as they can be easily converted into cash at any point of time without much wear and tear expenditures.

 Gold bars have been kept in the war chest of many central governments from the ancient ages.  US treasuries have the highest holding of gold sovereigns. All most all European countries preserve tonnes of gold in their treasuries. In India during the UPA regime, the Indian central bank bought 200 tonnes of gold for our country.  In general, during steep price declines, many central banks try to accumulate gold as they are aware of the inherent value of gold, especially when the global economies going through a rough patch of financial crisis.

Big investors invest in gold when the inflation is at a high because during high inflation gold will act as an inflationary hedge, with currencies usually depreciating at that time.  It is interesting to note that during the period of Brexit gold price appreciated quite a lot, because big players sensed that the pound will depreciate against major currencies including US dollar. Gold is also bought during period of geo-political tensions. For example, during the period of Iraqi invasion in Kuwait higher demand kept the gold prices substantially at a higher level.  During uncertainty of currencies gold will act as a good investment avenue to protect the currency volatility.

After UK’s decision to leave EU, investors started to accumulate gold because of their scepticism about the outcome of the complete BREXIT of EU.  Many analysts are expecting a sharp decline in UK’s GDP growth at least by around 1.5% after the BREXIT.  So in order to keep their wealth intact, they have to invest in US currency or in Gold.

Technically speaking, gold having been given a strong buying indication has breached $1350 mark for a troy of gold and is likely to test between $ 1500 & $2000 in the medium to long term.  After the global financial crisis in 2011, gold had made a high of $ 1833 per troy ounce and now again it is very likely to breach that level because of various reasons like BREXIT, geo-political tensions, terrorist attacks at various countries and existing volatility in the currency market. 

Government of India has started gold monetisation schemes to curtail the imports of gold to reduce the current account deficit. The aforementioned scheme is likely to burden the central government with huge losses owing to the high volatility in the gold prices.  Investors should keep in mind that it is always wise to invest in gold BEES, or in crude gold, than ornaments which usually carries a price tag of making charges which is above the original price of gold bars.  The resale value of gold ornaments can even cause capital erosion at least by 10-40% for an investor. So it is advisable to buy gold in paper form (gold bees) or in the form of gold bars.

 

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ALEX MATHEWS

ALEX MATHEWS

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