‘Gold’ rush every where, but don’t rush

Since time immemorial human being has been recognizing “Gold” as one of the most precious metals and I can say with authority that this is the only metal which has never lost its sheen in any continent of the world.

There are numerous examples where currency of a particular country has lost its intrinsic value and thus the buying power. At times even the most powerful currencies of the world like Dollar, Pound, & Euro etc. are under pressure and have to face depreciation in their value. But irrespective of economic condition of a country (whether recession, recovery or boon phase), intrinsic value of the ‘Gold’ was never questioned.


From this small introduction you must be convinced that Gold has a very important role to play not only for any country or a government but for each and every citizen of the world.

With rising inflation the purchasing power of paper money is diminishing fast and investment advisors are having a hard time to identify and recommend instruments which can beat inflation.

Remember, in the olden days ‘Gold’ was mostly used by our elders in the form of jewellery, which again was a demonstration of one’s wealth or financial soundness in society.

I remember in India during solemnization of a marriage the most precious gift which a bride would expect from her in-laws is nothing short of jewellery made of Gold. A woman can part anything but her gold jewellery.

Traditionally there is another practice in India where a mother would pass on her most precious treasure of gold jewelleries to her daughter when she is getting married. Off late Gold has emerged as an instrument of investment in addition to its traditional role as jewellery.

Nowadays most financial newspapers are filled with one or other stories on Gold and we are often made to think that by not having investments into gold we are missing something great.

Currently the whole world seems to be on a gold rush, as there are stories that emerging economies like China, India and Brazil are buying gold in large quantities to strengthen their respective reserves.

Gold has been sought after for its unique blend of near indestructibility, beauty, rarity and because of its status as a means of exchange and universal currency par excellence for centuries.

If major economies of the world are rushing for Gold, then what is the take for an ordinary investor? The perception about gold has come a long way from the days when its main function was to merely adorn and act as a status symbol.

The emotional investment in the metal was so huge that parting with it seemed unthinkable. Consequently, it seldom yielded worth-while returns. Now, however, it is becoming clear that an increasing number of investors are realizing that gold deserves a place not just in the cupboard at home or the bank locker, but also in one’s investment portfolio.

There is a shift in the mindset of investors. They are now looking beyond gold as merely a commodity for consumption and are realizing its worth as an investment avenue too. One of the major reasons for this paradigm shift in investor’s behaviour is due to a reality that gold has given steady returns over a period of time.

Why gold has become the talk of town in every corner of the world is due to unexpected movements experienced in its price during last 10 years. In the year 1970, price of gold was around USD 37/oz (per ounce). In 2000, the price rose to USD 273/ oz and by 2010 the prices of gold touched the height of USD 1,410/oz.

From hereon there seems to be no stopping over, as currently gold prices are rulling at around 1588/ oz. 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.

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, rather than changes in annual production.

According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. Out of this, about 2,000 tonnes goes into jewellery or industrial/dental production and around 500 tonnes goes to retail investors and exchange traded gold funds.

Thus for an ordinary investor, Gold, like any other precious metals, may be used as a hedge against inflation, deflation or currency devaluation. The currencies of all major countries, including ours, are under severe pressure because of massive government deficits.

The more money that is pumped into these economies (by printing of money basically), then the less valuable the currencies become. But the moot question remains as to how an ordinary
person can invest into Gold. Some potential options are:

(1) the most traditional way of investing into 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 major banks.

(2) Gold coins are also a common way of owning gold. Bullion coins are priced according to their fine weight, plus a small premium based on supply and demand.

(3) Another option to invest into Gold is by acquiring ‘Gold certificates,’ which allow investors to avoid the risks and costs associated with the transfer and storage of physical bullion.

(4) Modern ways to invest into Gold is through ‘Exchange Traded Funds’ launched by many mutual funds across the world. However, before I conclude our today’s topic, a word of caution - the above stated analysis on Gold does not mean that you immediately rush to invest into gold by liquidating all your existing investments.

But some exposure to gold should invariably be included in all diversified portfolios. A golden rule of thumb would be a minimum allocation of around 10% to gold and related goldinvestments, out of your total investment portfolio.

So look for an opportune time to invest into gold such that soon this wonderful metal forms an integral part of your investment portfolio!!!

Jagjit Singh, Technical Adviser
Unit Trust of Tanzania.
Email: jsingh@utt-tz.org