The investible potential of �Gold� as an asset class has been a function of jewelry & industrial demand, inflation outlook, strength of the dominant currency, geo-political stability and the gold supply variable. Given the historical and contemporary pervasiveness of gold as a store of value, and to a certain extent, medium of exchange, gold has adopted a tendency of behaving like a natural currency. Therefore, the investment demand for gold tends to rise in the case of adverse economic condition, rising inflation, weakening dollar, or general socio-political instability.
The 17.56% CAGR run-up in the gold prices since 2000 has largely been attributable to the surfeit liquidity in the early part of the decade, while in the latter half, the turbulent economic conditions post the sub-prime crisis, which continued to contribute to the gold rally.
However, despite the teetered recovery in the global economic environment, the optimistic outlook on gold remains unchanged. And here�s the reason why!
Today�s geopolitical climate has become increasingly volatile. This has spiked uncertainty in the region, which in-turn has provided significant buoyancy for gold prices.
However, it is the extensive hardship surrounding the sovereign debt solvency in the PIIGS nations that has caused increasing jitters to the financial markets. (and has spiked the performance of gold) Moreover, the likelihood of renewed slowdown in the U.S economy, and the prevalence of high unemployment, too continues to drive up the gold demand.
The credit ratings downgrade by S&P of the US economy, and of Italy, has only been the latest of the series of reasons to further enhance this view point. It is also believed that, were the troubled economies to resort to monetary expansion to wriggle their way out of their debt problems, the resultant erosion in money-value may further spike up prices in Gold.
Thus, the resultant investor wariness, and the decline in the global risk-appetite, in conjunction, is expected to fuel the institutional and retail demand for gold in the following months.
Also, traditionally, the gold demand has a seasonal flavor to it. The Autumnal festivities and onset of marriage season in India, all come along during this phase of the financial calendar. The interplay of these factors provides a potent case for investment in gold.
But, from a retail investor point of view, the physical investment in Gold has a minor side-effect. Buying physical gold involves the risk of theft, misplacement and potential wrong-pricing. Additionally, when an investor needs to sell his physical gold, again at that point, the investor has to go through the inconvenient route of valuation, bargaining, transaction and delivery.
All these angles involve risk, skill, and time - making the whole process inconvenient. But thankfully an alternative method to investing in Gold exists. That too, without the inconvenience of the physical transaction, that is Gold Exchange Traded Fund(GETF).
Gold ETF is nothing but Gold, traded online through a medium of exchange. Normally, each unit of gold ETF is worth approximately 1 gram of Gold. The investors take-away from GETF are that it allows the investor to invest in gold without bothering for the purity, the security or the liquidity of Gold investment that is attendant with gold hoarding. Also GETF�s online tradability and transact-ability is exactly like any other stock scrip, making buying and selling very convenient. An idea quite difficult with physical gold.
In other words, what GETF does is, it gives you an ability to buy, sell, or hold gold at convenience. This idea though relatively new in India, is has caught majorly elsewhere in the world. In India too, with rising awareness Gold ETF�s is gaining ground.
However, for an investor to invest and trade into gold through GETF, it is near mandatory that a demat account is held and managed by the investor. This necessity excludes a large segment of Indian investors from benefiting from the growth potential of gold. To do away with that, mutual funds have devised a mechanism through which the investor can invest into gold like any regular mutual fund scheme. It would also enable the investor to do an SIP in gold. We call it �Gold Fund of Fund (FoF).
In simple terms, Gold FoF collects the corpus from the regular investors and invests the same into Gold ETF. In lieu of the same, the investors of Gold FoF are provided a commensurate value of units in the folio. This mechanism ensures that investors obtain a stake in gold without the necessity of the demat account. Given this facility, the investors can plan a long term investment in gold at economical cost.
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