Most of the investors dont have the idea about which is the ideal form of investing in gold. Many investors still prefer buying gold coins and bars sold by reputed banks and safe-keep them in their bank lockers. However this method is the least preffered and inefficient option. This is because of the fact that most banks dont buy back gold and the investor must then turn to retailers to strike a deal. However,in the retail market, often jewellers prefer exchanging the coins or bars with ornaments itself rather than pay cash to such customers. So, if you are investing in physical gold, be prepared for some hiccups when it comes to liquidating it. So, in such a scenario its better to go for exchange-traded gold funds. These are mutual fund schemes investing in gold that you can buy and sell in a stock exchange. Since you dont own gold in physical form, you dont have to worry about liquidating it. You can sell the units of the scheme in a stock exchange at prevailing prices. Besides, you can also think of owning the stocks of some gold mining companies. Yes, they carry more risk but they can also give huge rewards.
Now the second question is why to invest in gold? Always remember that almost every financial instrument carries 3 types of risks. They are- Credit risk, Liquidity risk and Market risk. Credit risk is the risk of debtor not paying back. Liqidity risk is the risk that asset cannot be sold as a buyer cant be found. Market risk is the risk that the price will fall due to a change in market conditions.
Gold is unique in that it does not carry a credit risk and very low liquidity and market risk. Gold is no one's liability. There is no risk that a coupon or a redemption payment will not be made,as for a bond,or that a company will go out of business as for an equity. Also, value of gold cannot be affected by the economic policies of the issuing country or undermined by inflation in that country.
At the same time, 24 hour trading, a wide range of buyers and a wide range of investment channels available(including coins and bars, jewellery, futures and options, ETFs, certificates,etc) make liquidity risk very low.
However, gold is of course subject to market risk, as is clear from the experience of 1980s when the gold prices declined sharply. But many of the downside risks associated with gold prices are very different than the risks associated with other assets. For ex- the specific risks to which bonds and equities are exposed, including pressure on the health of the Govt and corporate sector during an economic downturn, are not shared by gold.
The gold price is typically less volatile than other commodity prices. This is because of the depth and liquidity of the gold market, which is supported by the availability of large stocks of gold. Because gold is virtually indestructible, nearly all of the gold which has ever been mined still exists. This means that sudden excess demand for gold can usually be satisfied with ease. Hence gold is slightly less volatile than heavily traded blue chips.
Also, the value of gold in terms of goods and services that it can buy has remained largely stable for many years. In 1900, the gold price was $20.67/oz,which equates to about $503/oz in todays prices. In the two years to end December 2006, the actual price of gold averaged $524. So the real price of gold changed very little over a century.
So,next time you get confused about where to invest, go for gold, afterall GOLD IS GOLD.
