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BW Businessworld

Gold Is The Future

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While the Budget was largely commodities neutral, more people are now looking at commodities as an investment option. The reasons are clear: true portfolio diversification, which not only adds depth and width to the portfolio but is also truly international in nature. To be fair, the budget did remove the contentious, and yet unimplemented, Commodities Transaction Tax (CTT) showing renewed government focus in encouraging commodity markets in line with global investment trends.

For personal investment, the most popular commodity to invest in is gold. History shows that during troubled times, gold is the best investment and recent times have borne that out. Even as you read this, a large amount of financial investment worldwide continues to flow into gold. Gold's year-on-year return in rupees has ranged between 15 and 30 per cent over each of the past four years.

In India, the most popular method of investing in gold has traditionally been jewellery, but 10-15 per cent making charges depreciate the value of the investment as soon as it is made. For pure investment purposes, the best method is to invest in gold bars bought from futures exchanges such as MCX and NCDEX because they give London Bullion Market Association (LBMA) approved 24 carat gold bars of guaranteed purity at transparent, market-determined prices. These can also be kept in demat form —just like equity shares. Buying coins is now an accepted method of investment, but again the price mark-up over pure gold is about 8 per cent, making it an inefficient investment.

 Clients in developed countries prefer to invest via gold Exchange Traded Funds (ETFs) and this approach is gaining popularity in India, too. ETFs are listed on equity exchanges such as NSE and BSE. The budget has increased the customs duty on gold bars by Rs 100 per 10 gram. This makes the initial investment marginally more expensive, but gold still makes for a good investment. International factors that affect the price of gold such as a weakening dollar, higher crude oil prices causing inflation, low interest rates, and continuing recession translate into firm gold prices. The depreciating rupee will also support rise in gold prices, as it has over the past year and a half. Besides, gold demand outstrips supply every year and the annual production of 2,500 tonne would fit into your bedroom!

So, how much of your portfolio should be gold? Empirical evidence suggests that an investment between 5 and 15 per cent in gold makes for good portfolio diversification and encompasses risks from currency and inflation. Delivery is also popular in India because of social compulsions. It is a must in any investment portfolio, and today, gold is shinier than ever before.

Apart from gold, investors can choose from several winning investment and trading strategies in commodities depending on their risk appetite. Trading in agri-commodities such as potatoes and wheat sounds unusual, but is very similar to equities because all commodities can be held in demat form. Instead of buy-and-hold, a safer way to invest is via spot-futures arbitrage such as buying in the electronic market (in demat form) and selling for delivery on the futures market neatly pocketing the difference. As investment options go, it has one of the finest risk-reward ratios and will suit risk-averse investors.

There are also ample opportunities to invest in commodities market by trading in industrial staples such as crude oil and base metals (copper, zinc, etc.), but because there is no provision for delivery so far, all trading is leveraged and, therefore, suits investors with a high risk-high return profile besides their ability to track and analyse international market trends consistently.

The benefits of portfolio diversification have never been more evident than today. The maxim "Don't put all your eggs in one basket" is most apt for investing, and diversification is the most important principle while constructing an investment portfolio. International experience shows that while stocks and mutual funds are closely related to each other and tend to have positive correlation with one another, commodities are a bet on inflation and have a low to negative correlation to other asset classes, and are a well-advised addition to almost every long-term investment portfolio.

Therefore, the question is not whether to invest in commodities, but rather which ones to invest in and which strategy is most suitable given the global investment environment.

The author is President of Religare Commodities

(This story was published in Businessworld Issue Dated 27-07-2009)