Why Gold?

GOLD, I was never very much interested in parking my money in this instrument of investment. But after the current crash of stock market I was looking for some other investment instrument which can at least beat the inflation rate in India. No doubt equity is the best instrument of investment provided you are a long term investor but nowadays Gold is also an equally good investment option and one should definitely have this in his portfolio. Especially considering the fact that future prospect of Gold seems to be very bright. Let’s first see the past two year’s performance of Gold and Sensex:

Date	Sensex	Gold ($/Ounce)
As on 31/03/2006	11279	581.50
As on 30/03/2007	13072.10	663.30
% gain in FY 2006-2007	15.89%	14.06%
As on 30/03/2007	13072.10	663.30
As on 31/03/2008	15644.40	918.00
% gain in FY 2007-2008	19.70%	38.39%

Table above clearly is in the favor of Gold. Apart from this Equity vs. Gold statistics why Gold finds a place in the portfolios are:

1. Statistics shows that Gold is a good hedge against inflation

2. Can be easily converted into hard currency

3. Has ornamental value (more so for Indians)

The price set for the international Gold market is currently dominated by the US Gold Market and the London Gold Market. Domestic Gold is priced according to the international price, so there are significant ties between the international Gold price and domestic Gold price. Statistics show that spot price differences between the international Gold market and the domestic one are usually within one percent of the other.

Factors that influence Gold price in international market:

International Gold price is heavily influenced by global affairs concerning on geopolitical issue, US dollars and oil prices etc.

International political issue:

When the political situation is unstable in key countries, will often affect the Gold price. After 9/11 international Gold price surged by 6%. Recently, the increase in the international Gold price has been attributed to the assassination of Pakistan's former Prime Minister, Benazir Bhutto.

Trend of US dollar:

The trend of US dollar has a very strong impact on the Gold price. When the dollar is weak, people will sell dollars and buy Gold to avoid taking a hit with the dollar's decline, causing a rise in the price of Gold. Conversely, if the dollar is strong, the Gold price will go down.

Trend of Crude oil:

Crude oil is economic resource, so a rise of oil price often causes inflation, when investors subsequently buy Gold to maintain wealth, causing a rise in Gold prices. Gold is seen as a good hedge against inflation.

Limited supply:

In most industries, rising demand kicks off an increase in supply that brings prices down. But Gold is often less than responsive as new supply is limited. There have been no new large discoveries of Gold. Even if a new mine is discovered, it will be about 10 years before the first ounce of Gold sees light of day.

In addition to these factors, performance of major stock markets in the world, the price levels of major commodities and global finance distress also causes Gold prices to fluctuate.

Why Gold????????????????

If we consider these influencing factors one by one………

US dollar is touching its low everyday…… causing Gold price to go up.

Crude prices are touching new high everyday…… again causing Gold prices to go up.

Current subprime crisis also appears to have sent investors into Gold.

Till recently, the dollar was used as a store of money globally due to the currency's stability and the low downside risk of a decrease in its value as it was the currency of the economic superpower of the world. But current downside in the dollar has moved people towards Gold.

The total value of all the paper money and bonds in the world is about $100 trillion, and all the Gold ever mined is just under about 5 billion ounces. So, world money, divided by world Gold, gives a figure of $20,000 per ounce. At $1000 per ounce, there is about $5 trillion dollars (5 billion ounces * $1000/ounce) worth of Gold in the world, but there is $500 trillion in derivatives, $100 trillion in bonds and paper money. Therefore, bonds and paper money must go down, and Gold must go up.