Gold: Now or later?

Last Updated: Wed, Apr 20, 2011 19:32 hrs

The yellow metal is shining again. International spot gold prices broke through $1,500 an ounce for the first time and on the Multi Commodity Exchange (MCX), it was trading near Rs 21,800 per 10g. This was on the back of a weak dollar, geopolitical problems in West Asia, concern over a sovereign debt crisis in the euro zone, high crude oil prices and inflation. A strong rupee negated the support, keeping local prices steady. With the West Asian/North African (Wana) crisis not likely to end soon and investors’ appetite increasing for gold, it is expected to touch $1,600 an oz by the year-end. Prices are expected to average at $1,455 an oz this year, in a $1,319-1,620 an oz range.

Given the high price, wait before entering this asset class. Only if the geopolitical situations in Wana stabilises will the price correct and that could be a good time to buy. If this does not happen, the prices will move from strength to strength. Continue holding the yellow metal if already invested. You may want to exit this asset class in tranches of five to 10 per cent over time once the is end in sight for the crisis in Europe and Wana.

Analysts continue to be bullish on gold and expect it to outperform other asset classes, as investors are looking for safer investment options, given the volatility in equities.

Paper gold is the most favoured way of investing, that is, gold exchange-traded funds (ETFs). But these face criticism due to the compulsion of having a demat account. A good alternative could be gold feeder funds. These give an option to invest through the SIP route, unlike ETFs. You are levied a cost of 1.5 per cent.

Those looking for systematic investment can also opt for the e-gold series at the National Spot Exchange. This is best advised for long-term goals like children’s marriage, as you can take physical delivery and use it for making jewellery. However, your cost will increase if opting for physical delivery, where the fee of Rs 200, irrespective of the quantity, and Rs 50 for every such request charged by the depository. It charges Rs 200 each for conversion of 8g and 10g coins, Rs 100 for 100g and no charge for a one-kg bar. You will also have to pay a value-added tax at one per cent and octroi for conversion of electronic units into physical coins (for Mumbai, 0.1 per cent). Physical gold is not attractive because of the higher purchase price and lower selling price, storage and safety. This route makes sense only if you are looking for consumption.

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