Gold trading: To do or not to do

Many investment experts are sceptical, but interest is increasing

Suparna Goswami Bhattacharya

October 10,2014:The yellow metal traditionally has caught the fancy of many — be it in the form of bars, or in the form of Exchange-Traded Fund (ETFs). Stocks and shares remain the best form of investment for many, but gold has been steadily making inroads in the minds of investors.

There is a growing consensus among academics, researchers and asset allocation experts that gold is a hedging instrument and a safe haven asset. Many finance professionals and trading companies, including GoldCore, The Royal Mint, DGCX, BullionVault among others, now believe that gold should form part of investment and savings portfolios. The reason could vary from portfolio diversification to financial insurance.

Historically, people’s interest towards gold investment is not entirely a new concept, though. There has been a steady rise in bullion trading, especially post 2008-09 Lehman Crisis. “The start of the world economic downturn in 2008 resulted in a significant increase in demand for gold from consumers on an international basis,” says a spokesperson from The Royal Mint.

During the financial crisis of 2008, the price of gold rose to $50 on one day, the largest one day move since 1980. This, according to experts, was mainly because people took refuge in gold and perceived it as something which has high credit quality.

According to research conducted by The World Gold Council, there is potentially £4billion latent demand for gold investment within the UK alone, but consumers have been deterred from taking the plunge because of the perceived barriers to purchasing precious metals.

Asian and Middle East markets have huge faith in gold. In Dubai, the value of gold traded stood at $75 billion last year, representing nearly 40% of the world’s physical gold trade.

Also, gold jewelry stores cater to different demand segments. Tourists, especially from India, account for the majority of gold consumption in Dubai.

By 2020, when Dubai is expected to attract 20 million visitors per year, the gold traded through Dubai is expected to increase further. Given the strong demand, more gold jewelry stores are opening across the emirate.

Mohammad Younis, Director of Sales and Business Development for Dubai-based Gold AE, says, “Every year, the awareness for bullion trading has been increasing. Recently, there has been a gold rush. Several new investors are being introduced to the bullion markets. We have been seeing the most number of first-time buyers in the past few years. It has proved to be one of the most popular investments for the past two years.”

Veteran investor Marc Faber, author of The Gloom, Boom and Doom Report, reiterates the need of gold for a diversified portfolio. And he is not alone. Other experts like Max Keisr, producer Keiser Report, a programme which give financial analysis, and Josh Arnold, independent trader of options and stocks and blog writer, feel that investing in gold is not a bad option at all and provides investors some respite from the volatile nature of markets.

It does not come as a surprise that gold is one of the few asset classes that is perceived by investors as a safe haven during times of economic turmoil. “It is also one of the few assets that can be easily liquidated to generate cash. As an investment instrument, we can also provide a tactical hedge against inflation,” says Ian Wright, chief business officer, Dubai Gold and Commodity Exchange (DGCX). Looking at the growing demand, the company plans to soon add a physically deliverable spot gold contract to its portfolio of products. “This will provide yet another tool to the bullion and jewelry industry, both in the region and abroad.”

However, despite the bullishness and steady interest in trading, progress has been slow and gold still has a long way to go before it can match the popularity of stocks.

The sceptics

And critics have good reasons to make you believe that as far as gold as an investment tool is concerned, it is best kept at a distance. For one, investments in gold do not really lead to an income rise. “What income does gold generate? It does not produce any cash flow as against equity,” says an investment expert in the UK who did not wish to be named for this story.

For many, gold acts only as a hedge against fluctuating currency. In fact, some investment analysts advise their clients against investing in gold. “If diversification is what you are looking for, invest in real estate or something. The returns are much higher. Gold is safe, but if one wants returns, then that is not the right thing to invest in,” says an investment analyst with India-based Kotak Securities.

Experts opine that the problem with gold is it does not produce profits and hence not fit to be classified as real investment like stocks.

For the past 34 years, the value of gold has not risen and has, in fact, just kept up with inflation. When adjusted with inflation, it has the same value it did 30-35 years ago.

However, according to Wright it should never be the case of equities or gold. “A balance between them is important. All asset classes expose investors to various types of risk. The important point is that in investment terms, a portfolio diversifies that risk,” he says.

Gold companies on their part are trying their best to build confidence among investors. “We are building awareness for gold in the market to teach people that gold should be your plan A and not plan B, and as we always say ‘don’t wait to buy gold, buy gold and wait’,” says Younis from Gold AE.

What the future holds, nobody can say with surety. For now, you can take a call — whether you want stocks, gold or a bit of both.

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