Monday, November 29, 1999

Gold exchange traded funds make investment in yellow metal safe & secure

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If one ponders a little on the history of the human economy, he will realise that gold still lingers around despite all the prosperity since the civilisation began. Irrespective of the conjecture during the 90s that gold is slowly being relegated to disuse, the fetish and the economics behinds this metal remain firmly in place. But what is the reason behind it?Firstly because, the 'money' is only as good as the 'exchange' it can bring for you. Either now or later! And this is largely dependent on the willingness of the second and third party to accept such 'money'. And this is where gold creeps in. Gold's 'value' is embedded in human history and collective psychology. Gold derives its economic value from the basic human urge to possess it. It is this natural ability of drawing human possessiveness that makes gold as the natural currency of the world, and helps the yellow metal display characteristics quite similar to that of 'ordinary money'.The dynamics of gold investment is based on the assured purchase value that the metal commands almost anywhere. And this inherent quality has stuck on. No surprise then that gold is still considered the final value hedge against the purchasing power of any currency that may be brought into question. Thus, at a subterranean level, a gold investment involves taking of two positions. An orthodox value hedge, and (this is implicit) a 'pseudo' currency stance.This intrinsic characteristic of gold is widely accepted by major central bankers, corporate, financial institutions and high net worth individuals. Therefore, investment in gold or gold-backed security is seen as an essential part of larger investment management wisdom.But, investing in gold has a minor side effect. Buying physical gold involves the risk of theft, misplacement and potential wrong-pricing by sellers. Additionally, when an investor needs to sell his physical gold, again at that point, he has to go through the inconvenient route of valuation, bargaining, transaction and delivery.All these angles involve risk, skill, and time, making the whole process inconvenient. But thankfully an alternative method to invest in gold exists. That too, without the inconvenience of the physical transaction, that is gold exchange traded fund (GETF).Gold ETF is nothing but pure gold, traded online through a medium of exchange. Normally, each unit of gold ETF is worth approximately 1 gram of gold at any point of time. It allows investors to invest in gold without bothering for purity, security or liquidity of gold investment that is attendant with gold hoarding.GETF's online tradability and transactability are exactly the same like any other stock scrip, making buying and selling an almost intra-day affair! An idea quite difficult with physical gold.In other words, what GETF does is that it gives you an ability to buy, sell, or hold gold at convenience. This idea, though relatively new, is becoming popular across the world. In India too, with rising awareness, Gold ETF's are gaining ground.The investment potential of gold is influenced by two factors; namely, the 'long hands of economics'; and the gold's negative correlation with the predominant currencies of the world. Currently, both these factors weigh favourably for gold.The gold demand in India and in China, the two top gold consumers, has continued to remain buoyant. On the other hand, the supply of gold is expected to come under increasing duress due to rising cost of production in the gold mining sector.Moreover, gold prices may witness additional support, given the scarcity of the metal vis-à-vis the demand, and the high turnaround time needed for the new capacity to pitch-in. As per the reports, the production trends of the gold mining industry have largely been on a decline. This, coupled with the fact that no major mining discoveries have been noted in last two years, gives reasons to cheer for the gold investors.But the real push for gold demand as an investment commodity is expected to come from the unravelling 'sovereign debt' saga being played out in the Euro-zone.At the crux of the crisis is the rising investor perception that certain European nations may find it difficult to service the high levels of debt that they may have incurred in the past. Along with this, the additional debilitating factor has been the inability of the involved nations to service their loan by using the fiat currency dictum (since they were bound by the Maastricht Treaty).But the double whammy has come in due to the fact that the predominant portion of these nations debt is held by external investors. As per estimates, around $ 600 billion may be needed by these nations in the current year alone; with nearly $ 2 trillion required over the period of two years.From an investor point of view, this improved potential of gold, along with the convenience of the ETFs, has come as an Akshaya Tritiya offering.

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