27-09-2013, 03:27 PM
AN EMPIRICAL STUDY ON INVESTMENT IN GOLD – A BENCHMARKING ANALYSIS
INTRODUCTION
“And the gold of that land is good: there is bdellium and the onyx stone‖. Genesis 2:12
For more than two thousand years gold's natural qualities made it man's universal medium of
exchange. In contrast to political money, gold is honest money that survived the ages and will
live on long after the political fiats of today have gone the way of all paper (Hans F.
Sennholz). Gold continues to be one of the most popular forms of investment for a very long
time. People across the latitudes and longitudes of the world prefer to invest in gold not just
because of its fascination, rather its specialty to hedge inflationary rates. A common man‘s
uncommon thinking about gold as an investment cum prestige symbol has made it, a life time
investment in hyper-heterogeneous society like ours. Gold enjoys the supremacy amongst
several investment alternatives such as real estate, equities and forex trading etc. due to its
liquidity and demand. Further, tangible and intangible factors like limited availability of
mineral gold, regulated extraction, global demand and supply, Government policies and
investors‘ mindset have made this yellow metal to glitter brightly than the past.
OBJECTIVES OF THE STUDY
This paper attempts to examine the significance of investment in gold. Further, in the paper
the author attempts to recognize return on investment in gold against the rate of inflation,
benchmarking bank deposits, real estates and equities. Hence the major objectives of this
study are listed below:
To understand the various forms of investment in gold
To study the volatility of return on investment in gold and
To analyse the impact of impact of inflation on investment in gold.
REASONS TO INVEST IN GOLD
If an investor considers a reasonable return or results in the short term, then gold is probably
not the right option. Investing in gold is no doubt a profitable option as it can be quickly
converted to cash. It is also convenient it can be physically carried easily wherever he goes
unless the quantity is very high. Since the performance of gold market is directly proportional
to stock market it becomes easy to make calculations.
Gold-A Precious Metal as Investment
Investment in gold enjoys numerous advantages over other metallic forms and Gold is the
most popular investment of all the precious metals. Platinum investment is very risky and
moreover it is not easily convertible to cash. Investment in silver does not enjoy huge
prospects in terms of financial gain and moreover silver occupies lots of space when
compared with gold.
FACTORS AFFECTING GOLD PRICE
The crude oil is one of the factors for inflation. As the prices of crude oil increases there is
upward pressure on inflation. In order to hedge against the inflation people invest in gold,
which represents an implied relationship between gold and crude oil prices. So during high
crude oil prices, high inflation, and declining equity market gold can be stored to hedge the
inflation.There is an inverse relationship between gold prices and US Dollars. In the past US
Dollars were considered to be a hedging instrument, but with the large debt accompanied by
heavy interest payments has made the dollar weak, which ultimately ruins its value for the
purpose of hedging. Gold is considered as hedging instrument because when the price of gold
depreciates the investors outside US will be benefited as the dollar price of the gold will
increase. In such circumstances investors can shift away from the dollar denominated assets
to gold, describing it to be as a hedge against currency risk.
CONCLUSION
In a nutshell, as global uncertainties continue to linger, gold will find favor among investors
looking for a safe-haven asset. Despite gold becoming costlier day-by-day, still its
sentimental value makes it an unavoidable investment alternative amongst other real assets.
Combination of several factors, including a weakening dollar, fluctuation in crude oil price
and volatility of global inflationary rates drive gold's price higher. Undoubtedly, investment
gold acts as a hedge against inflation over a period of time. However, it is very important to
note that the volatility of gold price does not correspond to volatility of inflation in short-run.
The rising disposable income and curiosity to invest in low-risk investments will certainly
drive up the gold price. Finally, investment demand will continue to play out fully, as gold
becomes an integral part of every individual‘s portfolio, which makes it to glitter all the time.