Introduction Gold as an investment

Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbour against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives. The history of the gold standard, the role of gold reserves in central banking, gold's low correlation with other commodity prices, and its pricing in relation to fiat currencies during the Late-2000s financial crisis, suggest that gold behaves more like a currency than a commodity.

Gold price
Gold has been used throughout history as money and has been a relative standard for currency equivalents specific to economic regions or countries, until recent times. Many European countries implemented gold standards in the latter part of the 19th century until these were temporarily suspended in the financial crises involving World War I. After World War II, the Bretton Woods system pegged the United States dollar to gold at a rate of US$35 per troy ounce. The system existed until the 1971 Nixon Shock, when the US unilaterally suspended the direct convertibility of the United States dollar to gold and made the transition to a fiat currency system. The last currency to be divorced from gold was the Swiss Franc in 2000.

Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a twice-daily telephone meeting of representatives from five bullion-trading firms of the London bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-day spot price, derived from over-the-counter gold-trading markets around the world (code "XAU"). The following table sets forth the gold price versus various assets and key statistics: (Table 1)

Trade World GDP US Year GoldUSD/ozt DJIA USD USD tn DebtUSD bn US dollar Index Weighted

1970 37

839

3.3

370

1975 140

852

6.4

533

33.0

1980 590

964

11.8

908

35.7

1985 327

1,547

13.0

1,823

68.2

1990 391

2,634

22.2

3,233

73.2

1995 387

5,117

29.8

4,974

90.3

2000 273

10,787

31.9

5,662

118.6

2005 513

10,718

45.1

8,170

111.6

2010 1,410

11,578

63.2

14,025

99.9

1970 to 2010 net change, %

3,792

1,280

...

3,691

...

1975 (post US off gold standard) to 2010 net change, %

929

1,259

...

2,531

...

Factors influencing the gold price

Today, like most commodities, the price of gold is driven by supply and demand as well as speculation. However unlike most other commodities, saving and disposal plays a larger role in affecting its price than its consumption. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewellery, with little value over its fine weight and is thus potentially able to come back onto the gold market for the right price. At the end of 2006, it was estimated that all the gold ever mined totalled 158,000 tonnes (156,000 long tons; 174,000 short tons). This can be represented by a cube with an edge length of 20.2 metres (66 ft).
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Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment (demand), rather than changes in annual production (supply). According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. About 2,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

Central banks
Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all aboveground gold as official gold reserves. The ten years Washington Agreement on Gold (WAG), which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 500 tonnes a year. European central banks, such as the Bank of England and Swiss National Bank, were key sellers of gold over this period. In 2009, this agreement was extended for a further five years, but with a smaller annual sales limit of 400 tonnes. Although central banks do not generally announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005. In early 2006,China, which only holds 1.3% of its reserves in gold, announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices.

It is generally accepted that interest rates are closely related to the price of gold. As interest rates rise the general tendency is for the gold price, which earns no interest, to fall, and as rates dip, for gold price to rise. As a result, gold price can be closely correlated to central banks via the monetary policy decisions made by them related to interest rates. For example if market signals indicate the possibility of prolonged inflation, central banks may decide to enact policies such as a hike in interest rates that could affect the price of gold in order to quell the inflation. An opposite reaction to this general principle can be seen after the European Central bank raised its interest rate on April 7, 2011 for the first time since 2008. The price of gold responded with a muted response and then drove higher to hit new highs one day later. A similar situation happened in India: In August 2011 when the interest rates were at their highest in two years, the gold prices peaked as well.

Hedge against financial stress

Gold, like all precious metals, may be used as a hedge against inflation, deflation or currency devaluation. As Joe Foster, portfolio manager of the New York-based Van Eck International Gold Fund, explained in September 2010: The currencies of all the major countries, including theirs, are under severe pressure because of massive government deficits. The more money that is pumped into these economies the printing of money basically then the less valuable the currencies become. If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.

Jewellery and industrial demand

Jewellery consistently accounts for over two-thirds of annual gold demand. India is the largest consumer in volume terms, accounting for 27% of demand in 2009, followed by China and the USA. Industrial, dentistry and medical uses account for around 12% of gold demand. Gold has high thermal and electrical conductivity properties, along with a high resistance to corrosion and bacterial colonization. Jewellery and industrial demand has fluctuated over the past few years due to the steady expansion in emerging markets of middle classes aspiring to Western lifestyles, offset by the financial crisis of 20072010.

Short selling
The price of gold is also affected by various well-documented mechanisms of artificial price suppression, arising from fractional reserve banking and naked short selling in gold, and particularly involving the London Bullion Market Association, the United States Federal Reserve System, and the banks HSBC and JPMorgan Chase. Gold market observers have noted for many years that the price of gold tends to fall artificially at the start of New York trading.

Investment vehicles: 1. Bars

The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Canada, Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or sold at the major banks. Alternatively, there are bullion dealers that provide the same service. Bars are available in various sizes. For example in Europe, Good Delivery bars are approximately 400 troy ounces (12 kg). 1 kilogram (32 ozt) are also popular, although many other weights exist, such as the 10oz, 1oz, 10 g, 100 g, 1 kg, 1 Tael, and 1 Tola. Bars generally carry lower price premiums than gold bullion coins. However larger bars carry an increased risk of forgery due to their less stringent parameters for appearance. While bullion coins can be easily weighed and measured against known values, most bars cannot, and gold buyers often have bars re-assayed. Larger bars also have a greater volume in which to create a partial forgery using a tungsten-filled cavity, which may not be revealed by an assay. One way of avoiding such a scam is to buy and hold gold bars that are held within the London bullion market (LBMA) chain of custody and store the gold in a LBMA recognized vault. The gold bullion held within the LBMA recognized vaults can be bought and sold easily. If it is removed from the vaults and stored outside of the chain of integrity, for example stored at home or in a private vault, the bar will have to be reassayed before it can be returned to the LBMA chain. This process is described under the LBMA's "Good Delivery Rules". The LBMA includes in this "traceable chain of custody" refiners as well as vaults. Both have to meet their strict guidelines. Bullion products from these trusted refiners are traded
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at face value by LBMA members without assay testing. By buying bullion from an LBMA member dealer and storing it in an LBMA recognized vault, customers avoid the need of re-assaying or the inconvenience in time and expense it would cost. Efforts to combat gold bar counterfeiting include kinebars which employ a unique holographic technology and are manufactured by the Argor-Heraeus refinery in Switzerland.

2. Coins
Gold coins are a common way of owning gold. Bullion coins are priced according to their fine weight, plus a small premium based on supply and demand (as opposed to numismatic gold coins which are priced mainly by supply and demand based on rarity and condition). The Krugerrand is the most widely-held gold bullion coin, with 46,000,000 troy ounces (1,400 tonnes) in circulation. Other common gold bullion coins include the Australian Gold Nugget (Kangaroo), Austrian Philharmoniker (Philharmonic), Austrian 100 Corona, Canadian Gold Maple Leaf, Chinese Gold Panda,Malaysian Kijang Emas, French Napoleon or Louis d'Or, Mexican Gold 50 Peso, British Sovereign, American Gold Eagle, and American Buffalo. Coins may be purchased from a variety of dealers both large and small. Fake gold coins are not uncommon, and are usually made of gold-plated lead.

3. Exchange-traded products (ETPs)

Gold exchange-traded products may include ETFs, ETNs, and CEFs which are traded like shares on the major stock exchanges. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly 0.1 troy ounces (3.1 g) of gold. As of November 2010,SPDR Gold Shares is the second-largest exchange-traded fund (ETF) in the world by market capitalization. Gold ETPs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. However exchange-traded gold instruments, even those which hold physical gold for the benefit of the investor, carry risks beyond those inherent in the precious metal itself. For example the most popular gold ETP (GLD) has been widely criticized, and even compared with mortgage-backed securities, due to features of its complex structure. Typically a small commission is charged for trading in gold ETPs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs), but that differ from traditional openend companies and UITs. The main differences are that ETFs do not sell directly to investors and they issue their shares in what are called "Creation Units" (large blocks such as blocks of 50,000 shares). Also, the Creation Units may not be purchased with cash but a basket of securities that mirrors the ETF's portfolio. Usually, the Creation Units are split up and re-sold on a secondary market.
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ETF shares can be sold in basically two ways. The investors can sell the individual shares to other investors, or they can sell the Creation Units back to the ETF. In addition, ETFs generally redeem Creation Units by giving investors the securities that comprise the portfolio instead of cash. Because of the limited redeem ability of ETF shares, ETFs are not considered to be and may not call themselves mutual funds.

4. Certificates
Gold certificates allow gold investors to avoid the risks and costs associated with the transfer and storage of physical bullion (such as theft, large bid-offer spread, and metallurgical assay costs) by taking on a different set of risks and costs associated with the certificate itself (such as commissions, storage fees, and various types of credit risk). Banks may issue gold certificates for gold which is allocated (fully reserved) or unallocated (pooled). Unallocated gold certificates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuing bank's gold on deposit. Allocated gold certificates should be correlated with specific numbered bars, although it is difficult to determine whether a bank is improperly allocating a single bar to more than one party. The first paper bank notes were gold certificates. They were first issued in the 17th century when they were used by goldsmiths in England and the Netherlands for customers who kept deposits of gold bullion in their vault for safe-keeping. Two centuries later, the gold certificates began being issued in the United States when the US Treasury issued such certificates that could be exchanged for gold. The United States Government first authorized the use of the gold certificates in 1863. In the early 1930s the US Government restricted the private gold ownership in the United States and therefore, the gold certificates stopped
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circulating as money (this restriction was reversed on January 1, 1975). Nowadays, gold certificates are still issued by gold pool programs in Australia and the United States, as well as by banks in Germany and Switzerland.

5. Accounts
Many types of gold "accounts" are available. Different accounts impose varying types of intermediation between the client and their gold. One of the most important differences between accounts is whether the gold is held on an allocated (fully reserved) or unallocated (pooled) basis. Unallocated gold accounts are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuer's gold on deposit. Another major difference is the strength of the account holder's claim on the gold, in the event that the account administrator faces gold-denominated liabilities (due to a short or naked short position in gold for example), asset forfeiture, or bankruptcy. Many banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency on a fractional reserve basis. Swiss banks offer similar service on a fully allocated basis. Pool accounts, such as those offered by Kitco, facilitate highly liquid but unallocated claims on gold owned by the company. Digital gold currency systems operate like pool accounts and additionally allow the direct transfer of fungible gold between members of the service. BullionVault, for example, allows clients to create a bailment on allocated (non-fungible) gold, which becomes the legal property of the buyer.

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6. Derivatives, CFDs and spread betting

Derivatives, such as gold forwards, futures and options, currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange (COMEX) and Euronext.liffe. In India, gold futures are traded on the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). The product symbol for gold futures is GC, and it is traded in a standard contract size of 100 troy ounces. CME Globex, CME ClearPort (CME Group) and Open Outcry (New York) are the primary futures exchange venues through which it is traded. The minimum fluctuation allowed in price is $0.10 per troy ounce, and it is held to a minimum of 995 fineness quality specification. As of 2009 holders of COMEX gold futures have experienced problems taking delivery of their metal. Along with chronic delivery delays, some investors have received delivery of bars not matching their contract in serial number and weight. The delays cannot be easily explained by slow warehouse movements, as the daily reports of these movements show little activity. Because of these problems, there are concerns that COMEX may not have the gold inventory to back its existing warehouse receipts. Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the UK, provide contract for difference (CFD) or spread bets on the price of gold.

7. Mining companies
These do not represent gold at all, but rather are shares in gold mining companies. If the gold price rises, the profits of the gold mining company could be expected to rise and as a result

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the share price may rise. However, there are many factors to take into account and it is not always the case that a share price will raise when the gold price increases. Mines are commercial enterprises and subject to problems such as flooding, subsidence and structural failure, as well as mismanagement, theft and corruption. Such factors can lower the share prices of mining companies. The price of gold bullion is volatile, but unhedged gold shares and funds are regarded as even higher risk and even more volatile. This additional volatility is due to the inherent leverage in the mining sector. For example, if you own a share in a gold mine where the costs of production are $300 per ounce and the price of gold is $600, the mine's profit margin will be $300. A 10% increase in the gold price to $660 per ounce will push that margin up to $360, which represents a 20% increase in the mine's profitability, and potentially a 20% increase in the share price. Furthermore, at higher prices, more ounces of gold become economically viable to mines, enabling companies to add to their reserves. Conversely, share movements also amplify falls in the gold price. For example, a 10% fall in the gold price to $540 will decrease that margin to $240, which represents a 20% fall in the mine's profitability, and potentially a 20% decrease in the share price. To reduce this volatility some gold mining companies hedge the gold price up to 18 months in advance. This provides the mining company and investors with less exposure to short term gold price fluctuations, but reduces returns when the gold price is rising.

Investment strategies
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Fundamental analysis
Investors using fundamental analysis analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices. They would also analyze the yearly global gold supply versus demand. Over 2005 the World Gold Council estimated yearly global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes. This makes gold very different from almost every other commodity. Identifiable investment demand for gold, which includes gold exchange-traded funds, bars and coins, was up 64 percent in 2008 over the year before.

Gold versus stocks

In the last century major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/gold ratio, an indicator of how bad a recession is and whether the outlook is deteriorating or improving, to a value well below 4. The ratio fell on February 18, 2009 to below 8. During these difficult times, many investors tried to preserve their assets by investing in precious metals, most notably gold and silver. The performance of gold bullion is often compared to stocks due to their fundamental differences. Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e., growth from anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison to gold in part because of the stability of the American political system. This
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appreciation has been cyclical with long periods of stock outperformance followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The gold price peak of 1980 also coincided with the Soviet Union's invasion of Afghanistan and the threat of the global expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3 and has fallen sharply since. On November 30, 2005 Rick Munarriz of The Motley Fool posed the question of which represented a better investment: a share of Google or an ounce of gold. The specific comparison between these two very different investments seems to have captured the imagination of many in the investment community and is serving to crystallize the broader debate. At the time of writing, a share of Google's stock was $405 and an ounce of gold was one day from breaking the $500 barrier, which it did December 1. On January 4, 2008 23:58 New York Times, it was reported that an ounce of gold outpaced the share price of Google by 30.77%, with gold closing at $859.19 per ounce and a share of Google closing at $657 on U.S. market exchanges. On January 24, 2008, the gold price broke the $900 mark per ounce for the first time. The price of gold topped $1,000 an ounce for the first time ever on March 13, 2008 amid recession fears in the United States. Google closed 2008 at $307.65 while gold closed the year at $866. Leading into 2010, Google had doubled off that (100%), whereas gold had risen 40%. The analysis of log-linear oscillations in the gold price dynamics for 20032010 conducted recently by Askar Akayev's research group has allowed them to forecast a collapse in gold prices in May July 2011. As of 18 July 2011, this collapse had not yet occurred, with gold at record prices of over $1600 per ounce. In his book Basic Economics, Thomas Sowell argued that, in the long-term, gold does not hold its value compared to stocks and bonds:
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To take an extreme example, while a dollar invested in bonds in 1801 would be worth nearly a thousand dollars by 1998, a dollar invested in stocks that same year would be worth more than half a million dollars. All this is in real terms, taking inflation into account. Meanwhile, a dollar invested in gold in 1801 would by 1998 be worth just 78 cents. India as a country has the highest consumption of gold in the world. At the same time an average returns in Indian stock market for last ten years from 2001 to 2010 if done via Systematic Investment plan has been 19%, whereas if same amount is invested in physical gold via Systematic Investment route then it is also at 19% in gold.

Using leverage
Bullish investors may choose to leverage their position by borrowing money against their existing assets and then purchasing gold on account with the loaned funds. Leverage is also an integral part of buying gold derivatives and unhedged gold mining company shares (see gold mining companies). Leverage or derivatives may increase investment gains but also increases the corresponding risk of capital loss if/when the trend reverses.

Technical analysis
As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically, this involves analyzing chart patterns, moving averages, market trends and/or the economic cycle in order to speculate on the future price.

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Current income
Gold in any form does not give any current income. The only exception is the dividend option in the gold ETFs. If held in the physical form, there is only outflow of cash for the maintenance of lockers.

Capital appreciation
Historically, gold has been the perfect hedge for inflation. This is based on data from the year 1800 AD. But in terms of absolute returns gold has fared rather poorly giving returns at only 0.8% above inflation. Real estate and shares beat gold squarely on the capital appreciation front. Real estate and shares have given returns of about 11% over inflation since 1979 (1979 as that was the year the index called Sensex was formed). In the short run, however, gold is a very strong bet, compared to shares which are highly volatile. The idea for gold investment will be to use it at times when the markets are falling and when the inflation is very high. A 5 per cent of the overall investment portfolio can be considered for gold investments (bullion, WGC coins, gold ETFs). Jewellery is not an investment as far as personal finance goes. It is only an expense for pleasure, symbolising wealth.

Risk

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Gold does not carry much risk at least in India, as we hardly see deflation in the real sense. Even when the official figures where showing negative inflation (deflation) during the last year, the actual prices of food items were increasing. This was reflected in the gold prices too. The real risk with buying gold is in the opportunity cost of investing in other avenues that can actually give higher returns.

Liquidity
Gold scores the highest in terms of liquidity, compared to all other investments. At anytime of the day and any day gold could literally be converted to cash. Banks would give you a jewellery loan. (Remember though that many banks do not give loans on coins, including their own). Gold jewellers would exchange your gold possessions for other gold jewels. But the problem here is that there is going to be making and wastage charges involved again. Here we lose the value (to the extent of 10% to 35%) of gold jewels. An unfortunate social aspect in most families in India related to liquidity is that, gold has sentiments attached and is the last item to leave the house in case of financial difficulties. This negates the entire purpose of gold having liquidity.

Tax treatment
Gold suffers capital gains tax as per the IT act. So it is better to ask your jeweller for the bill. Close to 90% of the gold jewellery traded in India is unbilled. This is a serious problem for those who look at gold as an investment. Only the branded jewellers would automatically give you a bill. At other places ask for one.

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We can make use of indexation benefits when calculating the capital gains of gold. So the tax payable will not be much. Gold does not have any other tax benefits. (Table 2)

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Why invest in gold?

Historically, gold has been a proven method of preserving value when a national currency was losing value. If your investments are valued in a depreciating currency, allocating a portion to gold assets is similar to a financial insurance policy. . In the past year, the climb in the price of gold above $1900 per ounce is due to many factors, one being that the dollar is losing value.

Reasons to say NO to gold

Gold doesnt pay income or interest. Gold was in serious bear market from 1980- 2002. Central banks have tons of bullion which they occasionally threaten to sell. If you dont count the last ten years, gold stocks have not done well. Since gold funds have made big moves over seven of the last eight years, they are now not doing too well. Your broker probably wont recommend gold funds.

Reasons to say YES to Gold

The dollar is weak and getting weaker due to national economic policies which don't appear to have an end. Gold price appreciation makes up for lost interest, especially in a bull market. The last ten years are a major bull move similar to the 70's when gold moved from $38 to over $800.
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Central banks in several countries have been increasing their gold holdings as part of their foreign reserves, instead of selling.

All gold funds are in a long term uptrend with bullion, sliding in 2011 as gold increased, but ready for an new gold bull market surge in 2012.

The trend of commodity prices to increase is relative to gold price increases. Worldwide gold production is not matching consumption. The price will go up further with demand.

Most gold consumption is done in India and China and their demand is increasing with their increase in national wealth.

All gold funds reached all-time highs in 2010 and will soon resume the advance.

The short position held by hedged gold funds has being methodically reduced. U.S government economic policies over the past decade have systematically projected the U.S. economy down a road with uncontrollable federal spending and uncontrollably increasing trade deficits. Both will cause the dollar to lose in international value and will increase the price of alternative investments, such as gold.

With the recent devaluation of many international currencies, the U.S. dollar was the international safe haven of last resort. We are seeing signs of this ending due to many financial factors, the most important one being a falling dollar.

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There are over two Trillion dollars ($2,000,000,000,000) of U.S. debt owned by foreigners which could be repatriated under certain conditions. This could cause a major decline in the value of the dollar and a soaring gold price.

If you believe in 'buy low, sell high', gold is still low, but climbing.

Why invest in funds? The 20 funds evaluated by EagleWing Research can be bought, sold, or exchanged on any market day, do not have a storage or liquidity problem and will quickly send you a fund prospectus upon request. Each is easy to get into and to get out of. In general, gold funds: 1. Provide professional management and diversification within the gold sector. 2. Are more volatile than the S&P index. 3. May or may not have any correlation with the general market. 4. Move daily with the price of gold, but not always. 5. Move proportionally more than gold, up and down.

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WHAT KIND OF "asset class" includes gold?

Dubbed the No.1 "diversifier" by serious analysts and wealth managers alike, gold clearly stands outside the three asset classes held by most private investors.

Bonds: Gold pays you no interest, not unless you lend it in return for a yield (rather than lend it in ignorance via an "unallocated" gold account). Nor does gold promise to repay your original capital at some point in time. There is no maturity date. But then, since gold is no one's debt to repay, the threat of default is zero.

Stocks: Gold has nothing in common with equities either. It employs no staff, no board of directors, and gives no quarterly earnings report. It doesn't make anything or provide a service beyond being yellow, shiny and rare.

Real Estate: Nor is gold anything like commercial or residential property. Even if you did rent it out, you still couldn't extend it or add a marble-topped plinth in the kitchen. Gold requires no upkeep (it's virtually indestructible), and there's no incometax to pay, because there's no income to tax.

No wonder Gold Bullion Investment fell out of favour during the property, bond and securities boom that got started as the runaway inflation of the 1970s started to fade. Gold didn't offer a dividend, yield or interest payment (it still doesn't). So as the soaring cost of living began to slowdown, investments offering to pay a regular income became more attractive. Those investments like gold that pay you nothing just weren't wanted. Nor could
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gold buy you anything either! This dumb lump of metal lost all official links to the value of money when Richard Nixon finally killed the Bretton Woods agreement in 1971. Refusing to exchange Dollars for gold, Nixon made Buying Gold a pure speculation rather than a way of holding cash.

More than that, gold actually costs you money to store and insure. A real sucker's trade, therefore, gold sank once the panic of the late '70s inflation slipped into memory and everything else shot higher. (Diagram 1)

But now gold has turned higher again. While trying to figure out why, you might also like to know just what kind of an asset class you're getting into if you Buy Gold today.

Cut free from the world's monetary system, gold's not listed as a currency by Bloomberg or Reuters. Instead, gold has come to be classed as a commodity "an article of commerce or a product that can be used for commerce" according to the National Futures Association.

Does it make sense to lump gold along with cocoa, orange juice, lean hogs and zinc? "The simplest definition of commodities is that they are raw materials," notes Katharine

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Pulvermacher in a 2005 paper for the World Gold Council and raw materials, by definition, are used to make other products: Wheat into bread; copper into electrical wiring; crude oil into gasoline; hogs into bacon...gold into...?

Invest gold into what? The quick answer is jewellery. The wrong answer is microchips. An ever-more common confusion is that gold bought today will make you a capital gain tomorrow. (After all, gold has risen nearly 25% inside three months!)

Another popular myth is that gold makes a cheerful partner for base-metal and oil traders, happily rising and falling in line with the price of crude, copper and zinc. The great bull market of the late '70s certainly mirrored surging prices for energy inputs. But just because dolphins swim, that doesn't mean they're pilchards and the parallels between Gold Prices and the broader commodity markets is by no means perfect.

In the twenty years to 2006, weekly price movements in gold showed a correlation of only 0.1 with the weekly move in commodity prices according to data from the Swiss National Bank (SNB). It would be nearer 1.0 if gold and commodities moved together.

What's more, the correlation has "varied heavily within the period," notes the SNB, "and despite similarities in [broad] price movements, the gold market has a number of distinct features."

Not least amongst gold's distinct features is the fact that it's (virtually) indestructible. That means there now exists an enormous supply of gold outstanding above ground and this makes gold as unlike crude oil as you can get.

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Gold does not get burnt up once it's been mined and refined. Instead, it just sits there not doing anything, but not vanishing either. That makes it very different from oil.

All told, says the educated guess-work by GFMS Ltd., the widely-respected London consultancy, there were some 158,000 tonnes of gold sitting above-ground by the end of 2006. (Diagram 2)

Only 12% was being used in industry. Meaning that just one ounce in eight had found its way into people's teeth, home-pregnancy testing kits, and mobile cell phones.

Yes, the proportion of new gold going into electronics and other industrial end-uses is rising; it will account for 19% of all the extra gold mined and supplied to the world market in 2007 say the analysts at Virtual Metals in London. That figure has risen from 14.5% in 2002.
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But the vast bulk of the world's gold is still not "consumed" by industry, even if new uses in nanotechnology and cancer treatments are regularly announced by the gold mining industry's marketing and lobby group, the World Gold Council. This sets it apart from both silver and the platinum-group metals, all of which are as heavily used by industry if not more so than they are by jewellery and investment buyers.

This relative lack of industrial value also separates the demand for gold almost entirely from the flux of economic growth. Price patterns come and go, but a 27-year study in 2003 covering both the bull market of the 1970s and the long slump that followed found that:

Gold showed "no statistically significant correlation" with changes in big-picture economic trends such as Gross Domestic Product (GDP), inflation or interest rates;

US stocks and bonds, in contrast, were linked to changes in the economy; Other commodities "such as aluminium, oil and zinc" also showed a much stronger correlation with economic changes than did gold;

These other commodities also showed a greater connection than gold to the returns earned from stocks and bonds.

"These results support the notion that gold may be an effective portfolio diversifier," concluded the study's author, Colin Lawrence, visiting professor at Cass Business School in London. He noted "the lack of correlation between returns on gold and those on financial assets such as equities."

Yet Lawrence still called gold a "commodity", a word that most people take to mean in its everyday sense something consumed as an industrial input or used as a raw product in our

27

homes. The vast bulk of the world's gold, in contrast, does not have this kind of economic purpose. It now exists in gold jewellery, central-bank vaults, and private investment portfolios instead.

Add them together, and these physical gold hoarders central banks, private investors and jewellery owners hold 86% of all the gold ever mined between them. Whatever "use" they believe they're making of gold, it's clear that their consumption does not destroy the metal.

While the long-term historical and traditional gold-buying motives of central bankers and jewellery owners deserves its own study, the Gold Market is clearly moving higher on a wave of investment demand right now.

"There is so much uncertainty around and if youre looking for a basic store of value what else do you choose?" asks Peter Hambro, head of the eponymous gold-mining company listed on the London Stock Exchange but hard-at-work in Russia.

"All currencies seem to be in a degree of flux. It is about how much currencies will devalue against gold. The Dollar will probably fall further so gold could reach the record high levels of the 1970s of $850 an ounce."

Hambro's reference to currencies is telling. RBC Capital Markets trade the metal on their currency, rather than commodity desks. "The right way to trade gold is as a foreign currency, not as a commodity," agreed Steven Mathews, commodities strategist at Tudor Investment Corp. in a 2003 study for the London Bullion Market Association's Alchemist magazine.

28

Mathews compiled data showing "days of supply" for each of the most heavily traded commodities. Stockpiles of soybean meal, for instance, stood ready to meet 2.5 days of demand on average.

Natural gas inventories held on average 37.5 days of supply. Silver used in batteries, soldering, catalysts, photography and electrical switches, as well as jewellery had 105 days of supply backed up. Coffee had 216 days...

And gold stood ready to meet more than 7,019 days-worth of demand. The nearest ready-athand stockpile was for platinum at around 15 months. But that pales next to gold's 19 years of supply.

"Its fair to say that nothing else even comes close," Mathews concluded, "[so] I dont classify gold as a commodity at all. Obsessively following mine production and demand are valuable only as a way of anticipating actions of other traders. Gold [instead] trades as a form of foreign exchange."

If gold does belong to the currency asset class, then the "stateless currency" is clearly beating all the rest in the first decade of the 21st century, outpacing Euros, Rupees, Chinese Yuan and Sterling. It touched a new all-time high vs. British Pounds on Friday 2 Nov., even as Sterling made a new quarter-century high vs. the US Dollar. But gold unlike the rest of the world's tradable currencies cannot raise or cut its interest rates to attract or dissuade currency speculators. Gold pays no interest whatsoever, remember. And while that might mean it has something in common with the Japanese Yen, it has nearly tripled against that currency so far in this bull market. It has also outperformed the three key

29

asset classes that still sit in most people's investment portfolios and "the investment motive is a much more important driver in the gold market than in the market for other commodities," as Philipp Hildebrand, vice-chairman of the Swiss National Bank pointed out in a 2006 speech. Given that gold doesn't pay you anything in yield, interest or dividends and that it does not have any real industrial value the "investment motive" for gold can only be explained as desire to quit other assets. Or at least, to hold an asset entirely free from what drives other asset markets up and down.

That's what happened during the 1970s.(Diagram 3)

During the last great bull market in gold, between 1970 and 1980, a portfolio spread evenly across US stocks and bonds would have lost 1.6% per year on average. Gold's annual gains, meantime, averaged 19.9%.

In real terms allowing for inflation the S&P 500 index actually dropped an average of 4.2% year-on-year. Gold Prices, on the other hand, out-stripped the soaring cost of living by more than 29% per year.

30

For bond investors, the real yield offered by US Treasuries collapsed during the 1970s. On the 10-year note, real yields averaged less than 0.4% above inflation. Indeed, they slipped below zero signalling a loss of purchasing power for two years starting in Sept. 1973, and again from Sept. 1978. Gold, meantime, rose 15 times over. But "the price for this 'insurance function'," as Philipp Hildebrand of the Swiss National Bank went on in that 2006 speech, "is reflected in the fact that gold is less profitable in the long term than other financial assets."

Gold certainly lost out to other financial assets during the 1980s and '90s. As bond yields rose above falling inflation, the S&P soared 12 times over. Gold Prices, in contrast, dropped 3% of their Dollar value every year for two decades on average. Between 1994 and 2000 alone, gold dropped by one-quarter. An equal mix of US equities and bonds, on the other hand, would have given you 10.7% returns annually on average.

Over the last seven years, however, the "insurance function" of gold has paid off handsomely and for the second half of this period, insurance wasn't even needed! Between New Year's Eve 1999 and the start of 2003, the S&P averaged a loss of 15% per year. Gold rose by more than 7.9% year-on-year.

Since then, the S&P has risen by more than two-thirds. Yet gold has also continued to rise, gaining 125% in the last four year even after the Tech-Stock Crash was finished.

Has gold's "insurance function" been cancelled? Just what are private investors buying Gold for today if they don't need protection from falling equities and crumbling bonds?

31

Well, perhaps the gold market says investors are looking for protection against falling bond, real estate and equity values as well as a falling US Dollar and slumping US economy. So they are buying protection ahead of time. And to do that, they're Buying Gold a wholly different asset from everything else.

Which gold fund?

When selecting a fund, an investor should be aware of significant differences between funds: Investment style................Very conservative or daring. Type of load.....................Front-end, Back-end or No-load. Expense ratios..................Varies from .4% to over 2% Portfolio turnover..............Varies from 2% to over 500% Fund sizes.........................Varies from $80 mil to over $5 billion.

Net Asset Value (NAV).....Varies from $8 to over $90.

32

LITERATURE RIVIEW
Adrian Ash (2011) in his article- Gold price 2012: 3 real risks has talked about the possible movements in gold prices in 2012. According to his study, 2011 has shown an all time high gold prices due to many reasons. He has mentioned that gold market has never shown a continuous bullish movement. It always changes its direction. For the movements in 2012, there are three reasons that are being highlighted and they are: Firstly, the crisis that emerged from Europe during second half of 2011 which affected the US gold market too. It is obvious that there will be an expected fall in 2012 in spite of a demand for physical gold. Secondly, china the worlds second largest developing nation will show a positive connection with the economic growth. Tight credit and stalling income are not expected to be good for gold. Thirdly, the volatility in gold prices is one reason for the risks.

33

Jeff Clarke (2009) has mentioned in his study- When gold will reach a new high, about the various price trends of gold. He specified that stall in price has happened before, but since 2001 its always eventually powered to a new high. He has spoken about the investors expectations on when the price of gold will reach a new mark. It makes sense that big corrections would take longer to reach new highs than small ones. His study says that gold has set a record on September 5 at $1,895 an ounce (London PM Fix) and to date has fallen as low as $1,531 (December 29), a decline of 19.2%. He has questioned that when do we reach a new high in the gold price? On one hand, gold could drop below the $1,531 low if the need for cash and liquidity forces large investors to resume selling. On the other hand, Europe and/or the US could resume money printing on a large scale and send gold soaring overnight. Regardless of the date he said that a new high in the gold price will come at some point, because many major currencies are unsound and overburdened with debt and theyre all fiat and subject to government tinkering and mismanagement.

34

Dave Brown (2011) in his article- Ten junior gold companies for 2012 says about a lower market capitalization than major gold producers which is often discounted by the market due to additional risk premiums. The share price can be leveraged to gold price increases, an initial discovery, or the significant achievement of commercial production. Stocks are competing with the gold prices. Earlier the same scenario was there when it had to cope up with the prices of oil. He has studied different companies trading in gold and some of them are Atac Resources Ltd (TSXV:ATC) for the Rackla Gold project, Continental Gold Ltd (TSX:CNL), Chesapeake Gold Corps (TSXV:CKG), Guyana Goldfields Inc (TSX:GUY), Rainy River Resources Ltd s (TSX:RR) etc. According to him, these are the companies which have announced the most prestigious projects for the target year 2012.

35

Rossie Murray (2007) in her article- Gold, is it really a safe heaven, mentioned about the advantage of gold being seen a safe investment when all others look bad to investors. It is limited and unlike shares in a company that can go bust, a precious metal is a tangible, own able thing. According to her, gold can be compared with buying a foreign currency. Gold, which is traditionally priced in dollars, is still weighed by a medieval measure called the Troy ounce. The rise isn't being driven by a higher demand for jewellery or the use of the metal in industrial processes. Instead, gold is being bought by investors, and by funds which are then bought by investors. When the big institutional investors pull out, the retail investors suffer. Though it has risen up but there is a lot of risks involved. Demand in countries such as China and India for industrial uses and jewellery will also remain an important determinant of gold prices. Moreover, she wrote gold does not provide any income, interest or dividends, there is only capital growth, and chances are there an investor can end up losing money. Because gold is priced in dollars, investors who buy it in the UK can fall victim to currency fluctuations. She identified that the problem with ETFs is that while they make buying gold comparatively easy, they make liquidating the investment easy as well; prompting a far more violent downturn than would otherwise be the case should trader sentiment reverse.

36

Adarsh Kazi (2011) in his contribution- All that shines is gold; talked about the present markets across the globes that are witnessing a bullish trend. According to him, investors have started to look out for alternate investment horizons as they believe that investing in equities may have become a bit riskier. He considers that a better strategy to invest around 5 10 per cent of funds in gold will be better. The best form to hold gold is probably gold bars. There are no making charges involved and as the purity and quantity is assured. Another good option is to buy gold coins which are available at all leading banks and with renowned gold. A dematerialisation account is needed for all these activities. He says that gold should be bought from the jewellers and retailers. Or a credible bank will help an investor get certified gold. To conclude he says that the prices may now be on the rise, it is still not too late to consider gold as an investment option.

37

Dave Kansas (2012) in his article- gold is still a lousy investment; says that gold is volatile and a fickle investment. Investors have given lot of interest to it and now it has the former, brightly tumultuous investment environment. Gold has had a terrific run. Prices have essentially doubled though the surge in gold prices masks some underlying realities. His study says that gold prices eventually reached about $850 an ounce. Oil prices were racing toward $100 a barrel and the stagflation days of the 1970s came up. Gold skidded from $800 an ounce over the next few years. Gold investing was then not given much importance. A mixture of fundamentals and fantasy drives the gold prices. But fundamentals don't support the soaring gold picture, which brings us to the fantasy which is the main driver of gold today. He also says that the interest in gold does stem from some fundamental issues, namely inflation and concerns about the dollar. Moreover the article says that the investors would be better served investing in Treasury inflation-protected securities, or TIPS. As for real pressure on the dollar, a more prudent strategy would be to invest in companies based overseas through an international or emerging-markets mutual fund or exchange-traded fund.

38

Emma Simon (2012) in her article- Will gold delivers another glittering year in 2012; mentions about the reports from the World Gold Council. Gold is traditionally priced in dollars and is still weighted by a medieval measure called the troy ounce. He questions that how long this gravity-defying rise in prices can continue. Moreover it is not clear that the ones who hold it shall go for more investments or not. On the one hand, he says about the fundamentals that have helped drive gold prices to such dizzy heights. She says about the debt problems in Europe have not been resolved; the threat of a double dip recession in Western economies still looms and demands for gold remains strong from emerging economies, particularly China and India. Gold prices should continue to climb next year at a slower rate. According to her, gold is and will be an attractive investment and there is evidence of investors increasing their portfolio exposure to gold-related assets. There are no asset class that has raised so much in value. The investments always do not keep going up indefinitely, and, when the price of gold does fall, it could be far and fast. Gold hasn't always proven itself to be a secure asset and its value has suffered from high levels of volatility. Moreover she says that the volatility itself is causing nervousness at present, with gold prices swinging dramatically in recent months. Gold is attractive but it is too volatile to be considered safe. There are risks involved in investing in gold. Gold doesn't pay any divided income either but, given that interest rates are so low, investors may feel this is less of a sacrifice in the current environment. Many point out that the real benefit of gold is as a diversification. It is still to consider gold in a diversified portfolio despite its increasingly unpredictable path. She has asked the investors to stay clear completely.

39

INDUSTRY PROFILE
Today's gold market is a round-the-world, round-the-clock business, played out largely on dealers' trading screens. The core of the business, however, remains in the key markets of London, as the great clearing house, New York as the home of futures' trading, Zurich as a physical turntable, Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions and Tokyo where the Commodity Exchange (TOCOM) sets the mood of Japan. EvenParis still has a small market, a reminder of the days when the French were great hoarders, while Bombay (Mumbai) has increasing importance under India's liberalised gold regime that permits official imports through local markets.

These regional markets reflect the growing pattern of liberalisation of the gold trade since the early 1990's. Until then, many countries either forbade the direct import of gold, or imposed high import duties, so that smuggling was substantial to countries such as Turkey or India. Today, however, relaxation has meant that local markets and exchanges can flourish legitimately. Consequently the pattern of gold flows from mine to end-user, whether in jewellery, industry or investment, is more direct. This pattern has also been influenced by growing gold production, particularly in Australia and the United States, which are now major sources of supply for Asian markets.

While physical gold movements have changed, the huge expansion of futures and options trading has also given a quite new dimension to the gold market since the 1980's.

40

This section of Gold Avenues encyclopaedia provides detailed briefings on the main markets, together with explanations of futures and options trading, cross-referenced to our detailed glossary of the terminology. The special situation ofofficial gold stocks held by central banks and the role of leading central banks and monetary institutions is also covered with individual entries on such key players as the Bank of England, the Swiss National Bank and the Bank for International Settlements. Our Markets Library also recommends books on the gold trade and the role of gold.

41

Gold reserve
A gold reserve is the gold held by a central bank or nation intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders (e.g., paper money), or trading peers, or to secure a currency. At the end of 2004, central banks and investment funds held 19% of all above-ground gold as bank reserve assets. It has been estimated that all the gold mined by the end of 2009 totaled 165,000 tonnes. At a price of US$1900/oz., reached in September 2011, one ton of gold has a value of approximately US$60.8 million. The total value of all gold ever mined would exceed US$9.2 trillion at that valuation.

IMF gold holdings

As of June 2009, the International Monetary Fund held 3,217 tons (103.4 million oz.) of gold, which had been constant for several years. In Fall 2009, the IMF announced that it will sell one eighth of its holdings, a maximum of 12,965,649 fine troy ounces (403.3 t) based on a new income model agreed upon in April 2008, and subsequently announced the sale of 200 tonnes to India, 10 tonnes to Sri Lanka, a further 10 Metric tonnes of Gold was also sold to Bangladesh Bank in September 2010 and 2 tonnes to the Bank of Mauritius. These gold sales were conducted in stages at prevailing market prices. The IMF maintains an internal book value of its gold that is far below market value. In 2000, this book value was XDR 35, or about US$47 per troy ounce. An attempt to revalue the gold reserve to today's value has met resistance for different reasons. For example, Canada is against the idea of revaluing the reserve, as it may be a prelude to selling the gold on the open market and therefore depressing gold prices.

42

Officially reported gold holdings

The International Monetary Fund regularly maintains statistics of national assets as reported by various countries. These data are used by the World Gold Council to periodically rank and report the gold holding of countries and official organizations. The gold listed for each of the countries in the table may not be physically stored in the country listed, as central banks generally have not allowed independent audits of their reserves.

World official gold holding (December 2010) (Table 3)

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

Sum

30,807.6

100.0%

United States of America

8,133.5

76.6%

Federal Republic of Germany

3,396.3

73.7%

International Monetary Fund

2,814.0

N.A.

Italian Republic

2,451.8

73.4%

French Republic

2,435.4

71.8%

43

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

People's Republic of China

1,054.1

01.8%

Swiss Confederation

1,040.1

15.3%

Islamic Republic of Iran

907[11]

42.0%

Russian Federation

883.2

09.2%

10

State of Japan

765.2

03.5%

11

Kingdom of the Netherlands

612.5

61.9%

12

Republic of India

557.7

09.6%

13

European Central Bank

502.1

35.0%

14

Republic of China

422.4

05.9%

15

Portuguese Republic

382.5

89.2%

16

Bolivarian Republic of Venezuela

372.9

67.7%

17

Kingdom of Saudi Arabia

322.9

03.3%

18

United Kingdom of Great Britain and

310.3

17.6%

44

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

Northern Ireland

19

Republic of Lebanon

286.8

32.2%

20

Kingdom of Spain

281.6

39.2%

21

Republic of Austria

280.0

57.0%

22

Kingdom of Belgium

227.5

41.2%

23

People's Democratic Republic of Algeria

173.6

79.5%

24

Kingdom of Thailand

152.4

04.6%

25

Libya

143.8

05.6%

26

Philippines

142.7

10.4%

27

Singapore

127.4

03.0%

28

Sweden

125.7

13.6%

29

Republic of South Africa

125.0

13.8%

30

Bank for International Settlements

119.0

N.A.

45

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

31

Republic of Turkey

116.1

07.0%

32

Hellenic Republic

111.7

81.3%

33

United Mexican States

106.3

04.0%

34

Romania

103.7

11.3%

35

Republic of Poland

102.9

05.3%

36

Commonwealth of Australia

79.9

09.5%

37

State of Kuwait

79.0

13.8%

38

Arab Republic of Egypt

75.6

14.8%

39

Republic of Indonesia

73.1

03.5%

40

Republic of Kazakhstan

73.6

12.5%

41

Kingdom of Denmark

66.5

04.1%

42

Islamic Republic of Pakistan

64.4

18.9%

43

Argentina

54.7

6.4%

46

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

44

Plurinational State of Bolivia

49.3

22.9%

45

Republic of Finland

49.1

24.6%

46

Republic of Bulgaria

39.9

12.0%

47

Republic of Korea

39.4

0.7%

48

Republic of Belarus

38.5

41.4%

49

West African Economic and Monetary Union

36.5

12.9%

50

Malaysia

36.4

01.5%

51

Republic of Peru

34.7

04.0%

52

Federative Republic of Brazil

33.6

0.5%

53

Slovakia

31.8

67.6%

54

Ukraine

27.9

04.5%

55

Ecuador

26.3

32.0%

56

Syrian Arab Republic

25.8

07.9%

47

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

57

Kingdom of Morocco

22.0

05.6%

58

Federal Republic of Nigeria

21.4

03.2%

59

Republic of Serbia

14.1

5.1%

60

Republic of Cyprus

13.9

58.3%

61

People's Republic of Bangladesh

13.5

07.5%

62

Netherlands Antilles

13.1

36.3%

63

Hashemite Kingdom of Jordan

12.8

05.5%

64

Czech Republic

12.5

01.6%

65

State of Qatar

12.4

04.4%

66

Kingdom of Cambodia

12.4

16.6%

67

Republic of Colombia

10.4

01.8%

68

Lao People's Democratic Republic

8.8

36.5%

69

Democratic Socialist Republic of Sri Lanka

8.1

5.3%

48

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

70

Republic of Latvia

7.7

05.5%

71

Republic of El Salvador

7.3

14.6%

72

Republic of Guatemala

6.9

05.8%

73

Republic of Macedonia

6.8

14.8%

74

Tunisian Republic

6.7

04.5%

75

Republic of Ireland

6.0

15.1%

76

Federal Democratic Republic of Nepal

6.0[12]

77

Republic of Lithuania

5.8

04.1%

78

Kingdom of Bahrain

4.7

0?.0%

79

Republic of Tajikistan

4.4

0?.0%

80

Republic of Mauritius

3.9

06.5%

81

Canada

3.4

00.3%

82

Republic of Slovenia

3.2

15.8%

49

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

83

Aruba

3.1

24.2%

84

Hungary

3.1

00.3%

85

Kyrgyz Republic

2.6

07.5%

86

Mongolia

2.3

04.8%

87

Grand Duchy of Luxembourg

2.2

10.6%

88

Republic of Suriname

2.2

13.1%

89

Hong Kong Special Administrative Region

2.1

00.0%

90

Republic of Iceland

2.0

01.3%

91

Independent State of Papua New Guinea

2.0

02.8%

92

Republic of Trinidad and Tobago

1.9

01.1%

93

Republic of Albania

1.6

03.4%

94

Republic of Yemen

1.6

01.8%

95

Republic of Cameroon

0.9

01.2%

50

Rank

Country/Organization

Gold (tonnes)

Gold's share of national forex reserves (%)

96

Republic of Honduras

0.7

01.4%

97

Republic of Paraguay

0.7

00.7%

98

Dominican Republic

0.6

01.1%

99

Gabonese Republic

0.4

00.8%

100

Republic of Malawi

0.4

08.9%

Privately held gold (May 2011) (Table 4)

Rank Name Type Gold (Tonnes)

SPDR Gold Shares

ETF

1,239

ETF Securities Gold Funds

ETF

259.79

ZKB Physical Gold

ETF

195.53

COMEX Gold Trust

ETF

137.61

51

Rank

Name

Type

Gold (Tonnes)

Julius Baer Physical Gold Fund

ETF

93.50

Central Fund of Canada

CEF

52.71

NewGold ETF

ETF

47.75

Sprott Physical Gold Trust

CEF

32.27

ETFS Physical Swiss Gold Shares

ETF

27.97

10

Bullionvault

Bailment

37.1

11

Central Gold Trust

CEF

18.81

12

GoldMoney

Bailment

19.55

52

World gold holdings (2008) (Source: World Gold Council) (Table 5)

Holding

Percentage

Jewelry

52%

Central banks

18%

Investment (bars, coins) 16%

Industrial

12%

Unaccounted

2%

53

Production
Since the process of mining gold is extremely capital- and time-intensive, supplying the markets and meeting demand has been a challenge all throughout history. And since mankinds lust and desire for this rare and precious metal is unwavering, people in all ranks of society have and will demand more and more of this beautiful metal.

And history can do a fine job illustrating golds supply crunch. For example, in 1900 when there were only about 1.6 billion people roaming the earth, a whopping 13 million ounces of gold was mined to meet demand. This equates to about 0.008 ounce per person on the planet mined that year.

It took about 65 years for the worlds population to double from there. During that time the global mined production of gold nearly quadrupled to a 1965 volume of 47 million ounces. This equates to a 75% increase in the per-person quantity of annual gold ounces mined.

And more gold per person makes sense as a number of studies have revealed that since 1800 per capita income has grown at a 50% faster rate than the population growth rate. So since wealth grows faster than the population, it makes sense that more people with more money want more gold.

Well in just the last six months or so the world population has achieved another double from 1965 to a global population of about 6.6 billion. And in 2006 mined gold supply is expected to come in at around 77 million ounces (using true production data provided by the World Gold Council and GFMS for the first three quarters of 2006 and projecting full year using simple average), which is an 18% decrease in annual gold ounces per person.
54

Is this decrease a supply dilemma, a demand dilemma or just a healthy balance? Confused yet? Now I know this is hardly a standard metric, comparing the world population with annual mined gold supply. But stick with me here because this does help paint a partial picture of what we may be faced with in the years to come.

It is indeed a fact that the world today is a lot wealthier than it was one hundred years ago. Vastly more money per person is floating around today than ever before. It is also a fact that over 60% of todays global population resides in the fastest growing economic region of the world, Asia.

One hundred years ago the fractional gold demand that came from poverty-stricken and economically-weak Asia was from a handful of aristocrats that squandered the wealth of their nations. But today the 4 billion people in these growing economies, those taught by their parents to save big and store their wealth in gold, will command a sizeable share of todays and tomorrows gold demand.

This long-repressed Asian populace will participate in a greater share of global wealth. And the Asians are not the only ones who will be plowing more money into gold. The Middle East petrodollars pouring in from this 21st century oil bull will also need to continue to find refuge. Middle Easterners are culturally attuned to gold investment and simply adore the shiny-yellow metal.

So as the world grows not only in population but industrially, technologically and economically, this wealth is and will be distributed among a portion of the world that has

55

historically had little opportunity to buy gold. In fact, the per-capita growth rate mentioned above had very heavy weightings from the US and Europe with insignificant growth from Asia.

So as per-capita growth rates now rise faster driven by the Asian people, there could be a huge market impact on gold demand. To put this in perspective, people that earned say $500 per year in the expanding Asian economies can sustain a large year-over-year income growth rate for an extended period of time. Even if only a small fraction of this income growth transfers into gold investment, it will surely be felt. More gold per person will be demanded.

Now in order to meet growing global demand, mined supply must continue to rise. When the world reaches a population of 8 billion people, projected for 2025, just to sustain the 2006 per-person consumption of mined gold, over 93 million ounces will need to be mined. And if per-person demand rises as expected, even more ounces will need to be produced. These are lofty figures for the gold miners to achieve, and I suspect gold will need to be priced much higher in order for them to have a shot at this.

Gold is driving the gems and jewellery export orders from India. According to the Investment Commission of India, exports are likely to grow to US$ 25 billion by 2012. Following are some of the India government steps to boost gold trade in the country.

56

India Government Initiatives

The Indian government has provided an impetus to the booming gems and jewellery industry with favourable foreign trade policies:

100 per cent foreign direct investment (FDI) in gems and jewellery through the automatic route is allowed

The government has lowered import duty on platinum and has exempted rough coloured precious gem stones from customs duty

Rough, semi-precious stones are also exempt from import duty

Duty-free import of consumables for metals other than gold and platinum up to 2 per cent of freight on board (f.o.b) value of exports

Duty-free import entitlement for rejected jewellery up to 2 per cent of f.o.b value of exports

Import of gold of 18 carat and above under the replenishment scheme

Setting up of SEZs and gems and jewellery parks to promote investment in the sector

In May 2007, the government abolished import duty on polished diamonds

The government has raised the limit value of jewellery parcels for export through foreign post office from US$ 50,000 to US$ 75,000 and the time period for re-import of branded
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jewellery remaining unsold has been extended from 180 days to 365 days

The export of coloured gemstones on a consignment basis has been allowed. The government has announced a series of measures to help gems and jewellery exports in the Foreign Trade Policy 2009-14.

It has been decided to neutralise duty incidence on gold jewellery exports, to allow duty drawback on such exports

In an endeavour to make India an international diamond trading hub, it has been planned to establish "Diamond Bourses"

A new facility to allow import of cut and polished diamonds on a consignment basis for the purpose of grading/certification purposes, has been introduced

To promote export of gems and jewellery products, the value limits of personal carriage have been increased from US$ 2 million to US$ 5 million in case of participation in overseas exhibitions. The limit in case of personal carriage, as samples, for export promotion tours, has been increased from US$ 0.1 million to US$ 1 million.

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The Road Ahead

The Indian gems and jewellery sector is excepted to cross US$ 26 billion by 2012, driven by availability of a huge base of skilled labour and improving lifestyle, according to a new report called "Indian Gems and Jewellery Market - Future Prospects to 2011", by RNCOS, published in September 2009.

According to the same report, the Indian gems and jewellery sector is expected to grow at a compound annual growth rate (CAGR) of around 14 per cent from 2009 to 2012.

According to industry experts the consumption of diamond jewellery in India is expected to touch US$ 6.41 billion in 2012.

State-run National Mining Development Corp (NMDC) plans to produce close to 100,000 carats of diamonds from the Panna diamond mines in Madhya Pradesh by 2010-11.

Indians have a huge fascination for gold. This is evident in the fact that India is the largest consumer as well as importer of gold in the world. Gold plays a very important role in the social, religious and cultural life of Indians. India Gold Market looks poised to achieve greater heights given the fascination for gold in the country. India consumes about 800 MT of gold which accounts to about 20% consumption of gold globally. More than 50% of this is used for making gold jewellery.

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Size of Indian gold market

The domestic Indian gold market is estimated to be more than US$15 billion and is expected to rise significantly in the coming years. During April 2008 to February 2009, gems and jewellery worth US$ 17.79 billion was exported from the country. United Arab Emirates imported more than 30% of gems and jewellery from India, making it the largest importer from the country. Hong Kong was the second largest importer with 25% followed by United States with 20%. The gem and jewellery industry accounts for more than 10% of India's total commodities exports.

Gold certification in India

The government has taken steps to protect the public from buying adulterated gold; Hallmarking of gold jewellery is one such step. Hallmarking of gold jewellery indicates the accurate finding out and official recording of the proportionate content of precious metals present in gold. The marking is done either by laser marking machine or by punches. Hallmark is the official mark used in several countries across the world as an assurance of purity or fineness of gold jewellery. The Bureau of Indian Standard or BIS was named by the Government as the lone agency in the country for providing hallmarking of gold jewelry under the provisions of the BIS Act, 1986.

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Indian standard on Gold and Gold alloys

IS 1417 Grades of gold and gold alloys, Jewellery/Artefacts-Fineness and Marking IS 1418 Assaying of Gold in Gold Bullion, Gold alloys and Gold Jewellery/ Artefacts Cupellation (Fire Assay Method)

IS 2790 Guidelines for manufacture of 23, 22,21,18,14 and 9 carat gold alloys IS 3095 Gold Solders for use in manufacture of Jewellery

Features of Indian Gold market

Though India is the leading consumer of gold in the world, the gold market in India is largely fragmented and unorganized. Due to the non availability of a benchmark price, the gold prices in India vary very much from region to region. The festive and the wedding season in the country witnesses a heavy demand for gold. Despite the global economic recession, the gold consumption in the country during these times has not abetted.

Factors affecting Indian Gold market

The monsoons and the harvest of the country have a significant affect on the sale and purchase of gold in the country. Both these factors determine the amount of purchasing power that people will have, which in turn decides on the amount of gold consumption and other consumptions as well. Purchasing gold and other precious metals on occasions like Akshaya Tritiya is considered to be auspicious.

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Recent hike in Excise and Import duty

India is the largest importer of gold in the world. India has imported $45.5 billion worth of gold and silver in first three quarters of FY12 itself, which is 53.8% over the year-ago period. A government notification said customs and excise duties would be levied on the value of gold and silver instead of a fixed amount in January 2012. The move is aimed at reducing the negative balance of payments position as gold and silver imports have grown tremendously in-spite of rise in its prices.

Import Duty

Excise Duty

Status

Gold

Silver

Gold

Silver

Current

2% of the value

6% of the value

1.5% of the value

4% of the value

Earlier

Rs 300/10 gm.

Rs. 1500/kg.

Rs 200/10 gm.

Rs 1,000/kg.

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World gold council

The World Gold Council is the global authority on gold and its uses and the first source of informed opinion and advice for stakeholders and decision makers. We use this knowledge to develop insights into the future role that gold can play across a number of sectors and then, in collaboration with partners, intervene to deliver solutions and create new markets, and to increase and sustain the demand for gold. In the Investment sector we make gold fundamental to investment decision making. For Governments and Central Banks, we are a trusted advisor to policy makers and reserve asset managers on all matters related to the gold market. In the Jewellery sector, we create new insights and ideas which increase the allure and significance of gold when given or worn. In the Technology sector, we work to place gold at the heart of technological advancement, and we are the authority on innovative uses of gold in industry and society. As the global advocate for gold, we are committed to playing a key role in the development of a responsible gold mining industry. Our members, the leading gold mining companies, regard the management of the local environment and relationships with local communities as paramount considerations during the lifetime of any mine project. Together, we work to ensure the industry as a whole is striving to develop and integrate best practice. All our work is informed by a deep understanding of the wide role gold has in society and its potential both now and in the future. Through commercial partnerships and industry leading research, we develop a clear understanding of, and insight into, each of its key markets. Using this insight, we create new, relevant and innovative solutions that deliver against

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clearly identified market needs. Our insight adds value to our partners and stakeholders across all sectors, and informs each of our programmes and market interventions. Our Market Intelligence section of this site contains our full range of research and insight.

Market intelligence The World Gold Council is the global authority on gold and its uses, and the first source of informed opinion and advice for stakeholders and decision makers. Our research provides authoritative analysis of key aspects of the gold market. We provide comprehensive market intelligence, helping to inform your strategic decisions. Our programmes and market interventions provide unique insights and add value to our partners and stakeholders across all sectors.

Investment research Our investment research programme provides investors around the world with key information about the dynamics of the gold market and about the investment properties of gold as an asset class.

Government Affairs research Regular publications from the our in-house thought leaders and industry experts, along with prominent academics and think tanks, provide informed views, research, and high-level advisory services to central bankers, policymakers, regulators and investors around the world.

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Technology research Mankind faces a range of new and significant challenges over the coming decades. As a unique component in technology, gold is offering solutions to some of the more serious of these issues. Climate change, pollution prevention, clean water supplies, falling energy reserves and the diagnosis and treatment of disease are some of the vital areas where gold is supporting effective technological solutions.

Sustainability research As the global advocate for gold we are committed to playing a key role in the development of a truly sustainable gold mining industry. We provide a forum for education and dialogue that helps to address the range of sustainability issues faced by the industry, our membership and society at large.

With the World Gold Council aggressively marketing social and religious functions as gold buying events, the demand has shot up in the recent years to record levels. Research shows that over 16,000 tons of gold is there in Indian households predominantly in the form of jewellery. The value of this as per market price is a whopping Rs 27.2 lakh crore ($591 billion). That is close to twice the foreign exchange reserves held by the Reserve Bank of India. Let's consider the factors one needs to be aware of and the knowhow of investing in gold. Any investor has to be aware of the different forms of buying gold. Jewellery, the most traditional and the dominant form of buying gold in India is in fact not an investment idea.

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The reason is that there are heavy losses in the form of wastage and making charges. This can vary from a minimum of 10 per cent to as high as 35 per cent for special and complex designs. Bank Coins again not an investment idea as the premium that banks charge for their coins is anywhere between 5 and 10 per cent. Also the bank coins have lesser liquidity as they are not bought back by the banks. World Gold Council Coins, these are coins issued by jewelers who are part of the WGC network. They have lesser premium over the market price (1 per cent to 2 per cent) and are redeemed at the market price when one takes them for selling off. Bullion Bars, are good modes for investment but the minimum investment here is much higher than a common investor can think of. Gold Exchange Traded Funds are a hot option these days. These are like mutual funds that invest only in gold. They are proving to be an easier and safer mode to buy gold. The charges are very less and the gold can be accessed electronically. The disadvantage is that one never gets to 'see' one's holdings.

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The Big 10 (Table 6)

Revenue mil.USD Rank Name Base Ytd Dec'10

Barrick Gold

Canada

10,924 34.3%[8]

Goldcorp

Canada

3799.8 39.5%[12]

Newcrest Mining

Australia

3579.8 41.4%[16][17][18]

Newmont Mining

United States

9540 23.8%[24]

kinross 3010.1 5 Kinross Gold Canada 25%[27]

AngloGold Ashanti

South Africa

5514 40.8%[30]

Gold Fields

South Africa

4592[33][34][35][36]

Polyus Gold

Russia

604

36.7%[40] 1H'10

Yamana Gold

Canada

1686.811 42.5%[43]

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Revenue mil.USD Rank Name Base Ytd Dec'10

10

Agnico-Eagle Mines

Canada

1422.5 131.8%[45]

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COMPANY PROFILE

BARRICK gold
Barrick is the gold industry leader, with a portfolio of 26 operating mines and advanced exploration and development projects located across five continents, and large land positions on some of the worlds most prolific and prospective mineral trends. The Company also has the largest reserves in the gold industry, with about 140 million ounces of proven and probable gold reserves1. In addition, Barrick has 6.5 billion pounds of copper reserves and 1.07 billion ounces of silver contained within gold reserves1 as of December 31, 2010. In July, 2011, Barrick acquired Equinox Minerals which adds a further 4.5 billion pounds of copper reserves from the Lumwana mine and 1.2 billion pounds of copper reserves from the Jabal Sayid project2. In 2010, the Company produced 7.8 million ounces of gold at total cash costs of $457 per ounce3 or net cash costs of $341 per ounce4 and produced 368 million pounds of copper at total cash costs of $1.11 per pound3. For 2011, Barrick expects gold production of 7.6-7.8 million ounces at total cash costs and net cash costs of $460-$475 per ounce3 or $330-$350 per ounce4, respectively. The Company also expects 2011 copper production of 450-460 million pounds at total cash costs of $1.60-$1.70 per pound3. Barrick has a successful track record of mine development, having built seven mines in five years with the most recent completion of Cortez Hills in Nevada in early 2010. Cortez Hills will be followed by the world-class Pueblo Viejo and Pascua-Lama mines with first production expected in mid-2012 and mid-2013, respectively. Pueblo Viejo and PascuaLama are anticipated to contribute 1.4-1.5 million ounces of average annual production

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over their first full five years of operation at total cash costs significantly lower than Barricks overall current cash cost profile5. Barrick has the gold industrys only A rated balance sheet and consistent with its practice of paying a progressive dividend, the Board of Directors authorized a quarterly dividend6 of 15 cents per share on October 26, 2011, which represents a 25% increase from the previous dividend of 12 cents per share. The Companys strong earnings and operating cash flows, combined with its positive outlook on the gold price, enables it to continue to make high return investments in its project pipeline and also increase its dividend. Over the last five years, Barrick has had a consistent track record of returning capital to shareholders, increasing its dividend by more than 170%7 on a quarterly basis Barrick was added to the Dow Jones Sustainability Index World for the fourth consecutive year in 2011 and maintained its listing on the Dow Jones Sustainability Index North America for the fifth year in a row. Barrick is also the only Canadian mining company to be ranked among the top 100 companies in the world for its sustainability and performance by the NASDAQ OMX CRD Global Sustainability Index.

Barrick is the worlds largest gold producer, with a portfolio of 26 operating mines, advanced exploration and development projects located across five continents, and large land positions on some of the worlds most prolific and prospective mineral trends. The Company also has the largest reserves in the gold industry, with about 140 million ounces of proven and probable gold reserves1. In addition, Barrick has 6.5 billion pounds of copper reserves and 1.07 billion ounces of silver contained within gold reserves1 as of December 31, 2010. In July, 2011, Barrick acquired Equinox Minerals which adds a further 4.5 billion pounds of copper reserves from the Lumwana mine and 1.2 billion pounds of copper reserves from the Jabal Sayid project.
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Title/ statement of problem A study on Gold as an emerging option for investment. Objectives of study:
1. To study the reasons for the demand in investment in the form of gold. 2. To know about the details of gold market and gold as an emerging preference. 3. To perform a research on investors perspective of selecting gold an investment option. 4. To understand the different forms of investment in gold that the investors prefer.

The research on this project is done on a primary data basis. The data are collected from investors who prefer gold as an investment option. The sample size was 100 investors. Data are collected and classified in the later pages.

Scope of the study The main purpose of the study is to find out details on the gold as an investment option. Gold has been accepted as one of the best investment in the recent times due to its rise in prices, high performance etc. The basic purpose is to find out the actual reasons of preference for gold as an investment option. And also the rising demand for gold as an investment.

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Data collection:
Questionnaires were given out to investors to obtain data regarding gold investments. It was conducted in a particular area. Primary data collected are classified and analysed in the later forms.

Investment questionnaires are framed generally to gather the type and kind of information an individual, group or organization is doing or interested at. This kind of questionnaires is effective in understanding the recent trend of investment. Moreover, it sometimes helps the respondent to understand where to cut short the investment as well. This particular kind of questionnaire is considered as an effective tool for gathering such private information. Hence, it should be so designed that the respondent does not face any problem while responding these questionnaire completely.

The limitations of the study:

It is time constraint. Sample size is limited and small. Actual study is to be performed based on international markets to obtain true values. It is limited to a certain locality.

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DATA ANALYSIS:
The data collected through questionnaire method are classified and analysed accordingly. Pie diagrams are used to show the distribution of the data. They are as follows:To find out whether investment activities are done by broker or by the investors themselves: (Table 7) Category. 1. Via a broker 2. Self No. Of Investors. 47 53

(Diagram 4)

Investment is done by-

Via broker Self

This represents the dependency of an investor for his/her investment activities on a broker. The sample that is tested shows that comparatively a larger no. of investors does it

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themselves than to go via a broker. This might be due to more awareness of investors and to save on the brokerage charges.

To find out whether the investor considers arbitraging as an alternative to increase wealth: (Table 8) Consideration. 1. Yes 2. No No of investors. 64 36

(Diagram 5)

Arbitraging of currency as an alternative option

Yes No

This data representation shows that most of the investors also prefer currency arbitrage as an alternate to the investment. They can gain from the differences in the bid and ask quotes of different foreign currencies like Euro and US dollars.

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Next question was to find out if the investor is aware about the market regulations and various ways of saving taxes on investment: (Table 9) Aware of market regulations etc. 1. Yes 2. No No. Of investors. 58 42

(Diagram 6)

Awareness of stock market

Yes No

Investors asked upon being aware of the stock market, it is found that most of their replies were positive. It also shows the involvement of different media like T.V, newspaper etc which makes valuable information related to stock market and investment, available to the interested parties.

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To explore the percentage of investors who have invested in different forms of gold: (Table 10) Type of investment. 1. Gold Certificates 2. Gold Accounts 3. Gold Stocks 4. Gold Mining shares No. of investors. 22 43 30 5

(Diagram 7)

Types of gold investment

Gold certificates Gold accounts Gold stocks Gold mining shares

Questioning on different preferences for forms of gold, gold account is found to be most popular one. Many banks facilitate this accounts wherein gold can be bought and sold just like any foreign currency. This is preferred probably for it being safer and profitable.

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The investors were asked about the amount of investment (in terms of percentage) in the form of gold that they have made out of their total investments. (Table 11) Amount of investment (in percentage). 1. Less than 25 2. 25-50 3. 50-75 4. More than 75 No. of Investors. 10 43 40 7

(Diagram 8)

Percentage of investment in the form of gold

Less than 25% 25-50 % 50-75 % More than 75%

The above pie diagram represents the amount of investment that an individual investor puts in for gold. It shows that most investors invest more or less 50% of their funds into gold related investments. This is due to the high performance of gold in the last one year. Moreover, it has given higher returns than the stocks and other investment vehicles.
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Followed by this, next the objective of investors to invest in gold was found out: (Table 12) Objectives. 1. It is more secure. 2. More value than financial instruments. 3. The investment is not affected by market phase. 17 No. of Investors. 36 47

(Diagram 9)

Objectives of investment in gold

More secure More value Unaffected by market phase

Above data gives us a clear view about the different motives behind investing in gold. It is seen that gold is considered as one giving more returns compared to other investment instruments. Moreover, many investors have considered it safer.

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To find out the investors perspective of risk involved in investment in gold. It may be high, medium or low. (Table 13) Level of Risk. 1. High 2. Medium 3. Low No. of Investors. 26 65 09

(Diagram 10)

Level of Risk involved

High risk Medium risk Low risk

The investors have given a diplomatic stand on the risk perspective of gold investments. 65% says it involves medium risk. This might be due to the safety of investments and its more or less constant returns over a few months.

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It is also found about the source of information for an investor before making an investment in gold: (Table 14) Sources. 1. Broker 2. Follow Journal 3. Others No. of Investors. 21 68 11

(Diagram 11)

Source of information that helps gold invesments

Broker Journals Others(news, newspaper etc)

The data collected shows the interest of investors in reading journals to make them more knowledgeable about the various opportunities regarding investments. It also shows the importance of the news and journals in delivering significant information to the investors.

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Investors have rated the gold investments (1-being the least and 5-bieng the highest) in the following manner: (Table 15) Ratings. (x) a. 1 b. 2 c. 3 d. 4 e. 5 No. of Investors. (f) 2 14 36 35 13

Calculation of mean, median and mode of the above data: MEAN. (Table 16) (x) 1 2 3 4 5 2 14 36 35 13 Total (f) 2 28 108 140 65 343 Fx

Therefore Mean (x-bar) = fx / N = 343 / 100 = 3.43

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MEDIAN. (Table 17) (x) (f) Less than cumulative frequency 1 2 3 4 5 Total 2 14 36 35 13 100 2 16 52 87 100

Therefore Median (M) = {(N+1) / 2}th value = {(100+1) / 2}th value = (50.5)th value = 50th value + 0.5 (51st value 50th value) = 3 + 0.5 (3 3) =3

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MODE. (Table 18) (x) 1 2 3 4 5 (f) 2 14 36 35 13

The mode for the data will be that value which has the frequency (f). Here, the rating 3 has a frequency of 36 investors. Therefore, the mode is 3.

Considering the rating of gold investments, it is found that majority have valued it 3 or more. This shows the increasing importance of gold as an emerging option of investment. Investors look at it as one of the most efficient investments which can give better returns in future.

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What are the possible factors that influence an investor to invest in gold? It may be the price of gold which has shown upward movement continuously over a period of time, value of the asset to investor etc. (Table 19) Factors. Price Value of gold Risk (compared to other assets) Other factors No. of investors. 47 17 6 30

(Diagram 12)

Factors contributing to the investment in gold

Price Value of gold Risks Others

Interpreting the most important part of the questionnaire, it is found about the various possible factors that lead to investment in gold. Price is considered the major factor which contributes towards investment in gold. The continuous upward movement of the gold is a possible reason. Besides other factors, value of gold as an asset-cum-investment is also significant.

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Interpretation:

Gold investments performance is better compared to other investments. Historically the gold investment has been slow but provided a very steady return. In the past one year (in 2009/2010) gold price has increased by more than 30%. Real Estate investment which can be called as a closes safe investment option to gold has lost more than 70% value.

Gold can be considered a recession proof investment option. Gold bullions in the form of coins and bars are perhaps the best form of assets.

The denominations is which he gold bullions are available are small and tradable. You need investment a huge amount at a time (unlike real estate) of investment.

Oil is another investment option whose growth is as robust as gold, but common investors can invest in oil only through funds by paying commissions. But in gold investment no commission is required.

Gold is also one of the most liquid assets after cash. In times of extreme urgency people can easily sell gold bullion for cash.

Gold value remains stable even when dollar value is crashing. Instead an opposite is often true like now, the value of dollar is diminishing and people/ government agencies are buying more and more of gold.

Gold is one asset which has beaten inflation in all times.

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Findings:
Investors consider investing in gold in terms of past returns on investment (ROI) that gold has given to its investors. Low ROI often questions the effectiveness of gold. Gold has helped beat inflation. Gold is the only legal tender that you can use to trade commodity in the market. Even government sells gold bullions that people can buy as investment. In time of financial crisis governments all across the world buys gold bullions because of certain investment logic.

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Suggestions & Recommendations

Gold investments can always be considered a way to protect money and diversify a portfolio. Gold prices have been steadily rising, therefore there is a good chance this trend will continue over the long-term, making it a good idea to put some money into gold investments now. Buying gold will be a great way to hedge against other investments. Due to uncertainty in the stock market and the value of the US dollar, it's a good idea to put 10-20% of investments into a hedge fund in order to protect oneself. It is better to get the help of an investment consultant. This is especially for the investors who have never invested in gold before. Interested investors preferring to gain from the price movements of gold, buying gold bullion coins are an excellent option. The best choices are the American eagle, the Canadian Maple Leaf etc. Before making a gold bullion purchase, always shop around for the best prices, as the mark-up on coins will vary from dealer to dealer. Gold bars are another gold investment option investors want to look into. Smaller bars are usually more expensive (per ounce) than large bars but are often easier to sell. In general, bars carry a higher price premium than coins. When investing in gold to diversify, one can be either conservative or aggressive and still add value to the portfolio. For more advanced forms of investment, avenues are such as numismatic coins. The value of these coins is based on its rarity, the number originally minted, how old it is and what condition it is in. Gold helps to stabilize a portfolio, thereby balancing out riskier investments such as stocks and bonds.
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The price of gold is not affected by a companys profit unlike stocks and bonds. Its price depends on supply and demand, the rate of the US dollar, inflation and interest rates. But instead of being negative, the price of gold moves in the opposite direction of stocks and bonds. When the market bottoms out, gold generally increases in value, thereby stabilizing the investment portfolio.

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Conclusion:
Gold is an exhaustible precious metal which is nearing exhaustion. May be in next 15 to 20 years the gold mining will stop because there will be no gold left to be mined. The price of gold is dependent on the demand and supply ratio. Now the demand of gold is partially sustained by the gold minings and gold stored by government agencies in central banks. The possibility of increasing gold demand and decreasing gold supports my conclusion on our famous question that is gold a good investment option. When there is no gold left to be mined on this earth, the demand of gold will be satisfied by banks and individual investors who have hoarded gold in the past. In those times of gold trading people who actually possess gold can price gold almost on their free will. At the time of global depression and economic slowdown, investors are looking at parking their investments safely. And gold is the obvious choice as a safe investment haven. During last two years, when all the asset classes have failed to perform, gold is the only investible asset that has remained upbeat. Gold is a hedge against the dollar and inflation. It has a very low correlation with other asset classes like equity and debt thereby a good asset to diversify the overall portfolio.

Gold Performance classes with other asset

Gold ETFs are open ended mutual funds that are passively managed and they mirror the return of spot price of gold. Gold ETFs are listed and traded on stock exchanges just like other stocks. Gold ETF gives investor an advantage to participate in the gold bullion market without taking any physical delivery of gold.

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Gold ETFs provide returns, which before expenses; closely correspond to the returns provided by physical gold. Each unit is approximately equal to the price of 1 gram. To invest in gold ETF one needs to have trading and demat account, as gold ETF can be traded only in demat form. Gold ETF is classified under mutual fund and is taxed as per debt mutual fund taxation rules. Investors investing in gold ETF are not liable to pay wealth tax.

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