INVESTING IN GOLD AND OPTIONS FOR THE RETAIL INVESTOR

Whenever the price of gold goes up, the personal fi-nance columns published in various newspapers and periodicals see hectic discussions about how much money an investor should set apart for investing in gold. However, during periods when the price of gold is stable or showing weakness, these very columns tend to be either silent about gold or go the other way and recommend against holding gold in the portfolio. But now that gold price in India is ruling at historic highs, there is a broad consensus that gold should always be a part of our investment portfolio, with a decent share of our total budget (anywhere from 10 to 20 percent) earmarked for the yellow metal. It is therefore time to look at what makes gold an enduring investment and also examine the various avenues available to retail investors who wish to add gold to their portfolio.

- Shri V.P.Nandakumar

Gold was historically used as a currency. When paper money came into the picture, it was initially backed by gold to inspire confidence. Gold holds the characteristics of a currency, a financial asset and also has quasi-foreign exchange attributes. After the US came off the gold standard in 1971, there is currently no other national currency in the world backed by gold. With the rise of paper currency, governments acquired great power to print currency at will. It is said that with great power comes great responsibility. However, the record shows that governments around the world have too often shirked the responsibility to exercise this power with due care. And whenever this power was misused, it set off inflationary spirals in the economy, which acted as a check on the power of governments to issue or print currency at will.

Gold is also a rare commodity which ensures its continuing appeal. Every year, fresh mining of gold adds only about 2,500 to 3,000 tonnes to the supply. According to the World Gold Council, the total amount of gold mined over the ages would be around 190,000 tonnes of which India is estimated to hold as much as 35,000 tonnes, and that is nearly 20% of al the global gold ever mined! This should be viewed against India’s share in land area at 2.4%, in population at 17%, and in GDP at 3.9%. Moreover, India’s share in global gold demand is about 22% a year (average annual net gold import of 800 tonnes) against a share of 2% in world trade.

Gold during an Economic Crisis