Another golden year ahead

2004 will again be a golden year. And this is a bus not a single investor should miss.

This year's bull run in gold markets represents a rare opportunity to participate in a methodical wealth-building process where significant amounts can be made.

However, this is not a get-rich-quick scheme. But the choice is in investors' own hands.

A serious investor willing to sink a portion of his time to study the gold market and learn how to develop a buy or sell strategy in the spot or the derivatives market, can grow wealth in a conservative and orderly, but sure fashion.

The success of a methodical investor will depend on the time and effort he puts in understanding the market and the disciplined investment strategies he adopts.

Why should I invest in gold?
Of late, an inverse relationship between the dollar and gold has been seen. The lower the dollar goes, the higher is the gold price. Gold price in the calendar year 2003 appreciated 20 per cent when dollar lost 5.25 per cent against the rupee despite being tightly policed.

And the indications are that dollar is heading for its second annual decline in a decade against rupee.

Why does the dollar move inversely to gold?
Currently, the dollar is the only international currency with nothing besides gold to challenge it. Besides being a commodity, gold is a universally accepted form of money.

All central banks around the globe hold gold as part of their foreign reserve besides foreign exchange and statutory drawing rights. As on December, 2003, the US holds almost 58.2 per cent of its reserves in gold. And it is the highest in the world followed by France at 55 per cent and Germany at about 45 per cent.

The US dollar has flagged in recent months despite fairly robust US economic data due to fears of a widening account deficit and low interest rates.

Most of the countries have invested substantially in the US treasury markets. The danger for the US treasury is that institutional investors such as the central banks of Japan, China and others are becoming disenchanted with their low yields and declining prices in their dollar-denominated holdings. This is going to push them towards hard assets such as gold. In the process, the demand for gold will shoot up and so will the prices.

How is the dollar related to gold in the Indian context?
India is a net importer of gold. The domestic production is almost negligible. And India is the highest consumer of gold in the world. Hence any fluctuation in the foreign exchange market affects the price of gold.

How do I invest in gold?
Currently, there are various options for an Indian investor. Gold in physical form, futures trading, gold-denominated certificates and gold deposit schemes. Companies which are into gold allied products and mining offer the potential to invest.

How do I invest in the physical form?
Gold in physical form, especially jewellery, is no big deal for Indians. For centuries, denizens of the sub-continent have been parking a substantial portion of their savings in the safe haven metal.

However, for pure investment purpose, jewellery may not be a very good idea because a lot of things such as lower purity of gold and unrecoverable making charges are attached to it.

Moreover, investment in jewellery also entails the alloy addition which lead to loss in investment at the time of sale. Investing in physical gold is more advisable in the forms of coins or bars of certified refinery. The ICICI Bank, Tanishq and leading local jewellers that have launched gold coins and bars are finding that the number of buyers of such products are increasing fast.

How do I trade in futures?
Futures contracts are traded on regulated commodity exchanges, the largest of which are the New York Mercantile Exchange Comex Division (www.nymex.com) and the Tokyo Commodity Exchange (www.tocom.org.jp).

India recently joined the bandwagon of countries running futures trading in gold. October marked a new beginning for about five lakh goldsmiths in the country armed with an opportunity to hedge their gold requirement at foreseeable cost and shun the volatility in international prices.

Futures trading in gold, after a 41-year ban, was kicked off in the country at the Ahmedabad-based National Multi Commodity Exchange of India Ltd (NMCEIL), the National Commodity Derivatives Exchange Ltd (NCDEX) and the Multi Commodity Exchange (MCX) of India Ltd. (For a specific guidance on futures trading, please refer to the article in Business Standard dated 6 January)

Which are the other invest ment options in gold?
The hassle of storing gold in a safe place and the cost attached to such storage is forcing investors to look for alternative investments in gold apart from holding the metal in physical form.

Apart from investment in gold coins and bars, the other investment options include mutual fund schemes, gold deposit schemes or gold mobilisation schemes, gold-denominated certificates (similar to that of promissory notes issued generally by leading established jewellers) and exchange traded funds.

While most of these avenues are yet in the pipe line, watch out for them. All or any of them can be launched soon.

The gold mobilisation scheme by banks has not taken off in the country but new gold deposit schemes are in the offing. Besides, mutual funds are planing schemes dedicated to investments in gold.

Leading jewellers already have monthly and yearly gold recurring schemes. Banks are also looking at issuing gold-denominated certificates which can be bought in cash and redeemed in gold. WGC has already initiated efforts in this direction.

Are their any mutual fund schemes?
None as of now. While the mutual funds are expected to launch dynamic gold investment schemes, the ideal scheme for a passive investor would be the one in the form of Exchange Traded Scheme.

The scheme is yet to get the regulator's approval, but it is worth noting that WGC has launched more or less similar schemes recently in the US and Europe. The passive investment scheme in gold would be an exchange traded scheme _ an open-ended fund, and will be listed on the exchange in the form of an exchange-traded fund tracking the domestic prices of gold through investments in debt paper linked to gold prices.

The scheme would be designed to provide returns which would closely correspond to the returns provided by gold. Each unit being offered will have a face value of Rs 100 each or equivalent to the price of 1 gram of gold (about Rs 500) and will be issued at a premium equivalent to the difference between the allotment price and the face value.

Units allotted under the scheme will be listed on the stock exchanges and can be bought/sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other exchange where it is listed. The authorised participants and large investors will be able to directly buy or sell with the fund in creating units.

It will provide efficient arbitrage between the traded prices and the NAV, thereby reducing the incidence of such units being traded at a premium/ discount to NAV.

Moreover, the units will be available in dematerialised form, which will help consolidate them with other portfolio holdings and also eliminate the need for and risk of physical storage. On the other hand, the new gold savings account being worked out by the WGC in conjunction with banks would offer systematic investment plan.

Which are the companies engaged in gold allied activities?
India has only one listed gold mining company "" Deccan Gold Mines Ltd. Besides this, an investor can also look at the gold-friendly metal companies associated with copper. Gold is often found with copper ores and the companies into copper business do have certain amount of gold output from their factories.

But this will require a sound research and analysis before actually lapping up the stocks of these companies. Though at the current levels, the copper prices are also shooting up (so the chances of losing money in these stocks are minimal).