Should you buy gold NOW?

Gold prices are again moving up after a downward slide. But will this upward movement sustain? More importantly, should you buy more of the yellow metal now? Here's the answer.

For us Indians, gold is a symbol of purity, prosperity and opulence. However, globally, gold normally trades like a commodity -- the most precious commodity. Not only is it universally accepted, it is also considered as safe haven in times of economic turbulence and an effective inflation-hedge.

Recent developments

Whenever investors lose confidence in currencies, stock markets, and the overall economy, they turn to gold. Gold and silver would both rise due to demand as a safe haven when markets crashed. But last month, gold prices saw a correction of around 6 per cent from the peak and have fallen sharply along with equity; stock markets around the world saw significant falls due to worries concerning the Eurozone sovereign debt crisis and recent announcement by German finance minister that no bailout game plan is to be announced during the coming month(s), Chinese third quarter GDP data (of 2011) showing a fall, and not enough overall new demand being generated for gold.
 
Adding to this, the domestic demand for gold has also been low due to the inauspicious ("shraadh" period) in September (ending September 26).

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Buy, hold or sell?

However, amidst all this madness, what should an individual investor like you and me do? Should we buy more gold expecting further increase in its price or should we sell it now before there is further correction? Or wait and see how the prices unfold in the near-term?

No doubt gold is a reliable asset class and provides good diversification to our portfolio and would continue to provide decent hedge against inflation.

In the short-term, experts say there will be a slow rally in gold prices; being the festive season, the demand will be more for gold jewellery than gold bars and coins.

In the long-term however, gold prices will be largely determined by currency prices and inflation rate. Lower the reserve currency (presently, US Dollar) and higher the inflation rates, the higher the price of gold and vice versa.

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What to do NOW?

Since we Indians find it auspicious to buy gold during Diwali, the recent correction in gold prices can be used an opportunity to further purchase gold. It would be wise to invest systematically and at dips. However, don't get carried away by its glitter.

Gold's purpose in one's portfolio is not as an investment but an effective tool to counter inflation. The allocation can be up to 15 per cent of your total portfolio (as a hedge against globally lingering uncertainty, financial crisis and inflationary prospects); it can be apart from the jewellery that one holds for self or gifting purposes.

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Many ways to invest in the yellow metal

Physical gold

You get to use jewellery, but its purity, storage, making charges poses problems; higher tax on profits from sale.

Gold jewellery

It is one of the oldest forms of investment which also has some amount of pride and honour attached in the hearts of Indian families. It is something you can use and enjoy and at the same time it keeps appreciating in value.

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Gold bars and coins

Gold bars and coins are quite popular not only as an investment but also as a gift. Physical storage is a pain as one may invariably need to incur extra cost in renting a bank locker and/or insuring your possession.

Moreover you also need to be careful about adulterated and fake ones. There is also a substantial difference between buy and sell rate of gold coins and bars.

Gold electronically traded funds (ETFs)

More popularly known as ETFs. They are a type of mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding is denoted in units (usually 1 gram of gold is considered as 1 unit) which is listed on the stock exchanges (such as Sensex and Nifty), just like a share.

The price is expressed as NAV (net asset value) which represents the price of one unit (equivalent to 1 gram gold) on that particular day. ETFs offer many advantages such as no purity/storage issues, high liquidity, lower tax on profits than physical gold/metals and ease of investment.

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Gold futures

Relatively new to Indian investors; requires high risk -- can make or break a fortu#8800 currently not a retail investor's cup of tea.

Gold mutual funds (or E-gold)

Invest in companies involved in gold mining and production; same as ETFs with respect to liquidity and taxation.