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Neeraj Chauhan is a Certified Financial Planner and CEO of The Financial Mall. The Financial Mall is a financial supermarket & in operation for over 20 years. It manages total financial affairs of clients through wealth management and financial planning Process.

Thursday, September 8, 2011

Will glittering gold glitter more??

Over last six years Indian women’s have their laughs and points proved of their investment decisions in gold (though they bought jewellery) Good part is husband is not complaining either this time. In a country where women love yellow metal more than anything now has got a reason to buy more but poor husbands are in dilemma.

The questions come to mind is “Will gold continue to glitter”

 Around the world, investors prefer to buy gold, especially during these days of tough economy. Although there was a temporary dip in the price of gold in 2008 due to recession, demand for gold has been steadily increasing. Is this a unique phenomenon of the United States dollar, or is it an international phenomenon since it involves the major currencies of the world?

Asian countries which are growing in economy invest in gold more than the westerners. India and China are growing as big consumers of gold market. Demand for gold is increasing in India by leaps and bounds. Statistics say that the Indians buy about 25% of the world’s gold, purchasing approximately 800 tons of gold every year, mostly for jewellery.

For Indians and most other Asian people, Gold has been the symbol of power, strength, wealth, warmth, happiness, love, hope, optimism, intelligence, justice, balance, perfection, summer, harvest and fertility.
Important reasons why people go for gold investment and what factors contribute to it’s rising prices:
1.      Gold behaves more like an international currency than a commodity
The primary reason for gold investment is that gold behaves more like a currency than a commodity. Commodity prices change horribly in correlation with crisis in society. But change in gold price is low in correlation with other commodities.

2.      Impact of Inflation:

During inflation when the value of the currency decreases, the price of gold shoots upwards. The actual rate of inflation can differ significantly from inflationary expectations. However, the movement of gold is related to both these figures equally. So, even if the figures do not show marked increase in inflation, expectations can cause gold to stay up.
It is expected that the inflation seen in India and China will offset the deflation in the United States. Deflation means federal interest rates will remain low and this will again contribute to the growth of gold prices. This means that as long as the dollar stays weak, gold will continue to peak in 2011.
3.      Gold as a deciding factor
When the price of gold moves upward in multiple currencies, including dollar, investors worldwide have to take resort in gold since they find yellow metal as a better way to hedge their economic futures against a decline in the purchasing power of their own currencies.
4.      Demand for saving
People go for gold as a means of saving or investment whenever there is an economic crisis. Like any other commodity the price goes up when there is greater demand. So also when there is a great demand as well as speculation for gold automatically its price goes up. But the difference with gold is that unlike most other commodities saving and disposal plays a larger role in affecting its demand and price than its consumption.
5.      Constant Turmoil in US and European Markets and natural calamities like Tsunami in Japan
Political and economic events in the world play an important role in the rise in gold prices in global markets, as happened in the Asian markets and early in this century, when gold prices rose by more than 25% compared to last year.
6.      Rise in demand of gold due to ETFs
Gold ETFs have come into play in recent times which are giving gold buying power in the hands of common masses. Anybody with a DMAT account can easily buy gold in as less as Rs.500 in form of gold certificates. This helps people in buying gold with low amounts too and be able to accumulate gold in their portfolio without any upper limits.
7.      The high cost of gold mining and the lack of large mines in recent years have also led to rise in gold prices.

Circumstances in Which Gold Prices May Crash

Over the course of history, rapid rises in the prices of commodities have eventually crashed just as suddenly. Ten years is seen as a good run and many anxiously look for signs that the gold bubble is about to burst. To a certain extent, the hype created about gold is responsible for the steep price increase. Hence, the moment the hype dies down, prices will also fall. The 'safe-haven' appeal of gold is also fast decreasing in the wake of the weakness it displayed in times of recent turmoil.
The dollar will not stay weak forever and as soon as it strengthens, gold prices will move inversely.
Thus, it would be a safe bet to say that it’s best to balance one’s investments in various asset classes with maximum cap of 10-15% in gold (including jewellery).
One should stick to his asset allocation and rebalance his portfolio in the wake of upsurge in Gold prices. We suggest investment in Gold through ETF/ E-gold as per needs and financial plan.

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