GOLD as an investment

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Gold is the oldest precious metal known to man and for thousands of years it has been valued as a global currency, a commodity, an investment and simply an object of beauty. GOLD AS AN INVESTMENT


G old, the first metal used by humans, remains one of the most valued metals since prehistoric times. Egyptian hieroglyphs dating 2600 BCE describe gold as something king Tushratta of the Mitanni claimed was as "common as dust" in Egypt. Egypt and Nubia had the resources to make them major gold-producing areas for much of history. Gold is also mentioned several times in the Old Testament. Gold has long been considered one of the most precious metals, and its value has been used as the standard for many currencies (known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties. History

Major Characteristics:

Gold is unique as it is both a commodity and a monetary asset. Its stability and high value makes it virtually indestructible and ensures that it is almost always recovered and recycled. There is no true consumption of gold in the economic sense as the stock of gold remains essentially constant while ownership shifts from one party to another. Although gold mine production is relatively inelastic, recycled gold (or scrap) ensures there is a potential source of easily traded supply when needed, and this helps to stabilise gold price. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets. Major Characteristics

Global Supply Demand Scenario:

The total above ground stocks of gold is estimated to be around 1,63,000 tonnes by Gold Fields Minerals Services (GFMS) as on end of 2008 Out of this total stock, 51% is estimated to be present as jewellery , 18% as official reserves, 17% held as investment, 12% used for industrial purposes and 2% is unaccounted for. Jewellery accounts for almost two-thirds of annual gold demand with investment and industry being the other main drivers. The total annual global demand for gold has averaged 3530 tonnes in the last three years (2005 - 2008). However, it is expected to dip slightly in 2009, owing to the sharp rise in prices. Global Supply Demand Scenario

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Five countries, viz., India, China, USA, Turkey, Saudi Arabia and UAE account for above 60% of gold demand, with each market driven by a different set of socio-economic and cultural factors. The total global mine production is relatively stable, averaging approximately 2,455 tonnes per year over the last three years. Recycling of old gold scrap and official sector sales are the other major sources of supply, which have averaged 1084 tonnes and 378 tonnes in the last three years. South Africa has been a major gold producer since 1880s and it is estimated that about 50% of all gold ever produced has come from this nation. While, during the early 1980's it produced about 1000 tonnes , the output in 2007 dropped to just 272 tonnes . China with a production of 276 tonnes , overtook South Africa as the world's largest gold producer in 2007 for the first time since 1905 that South Africa has not been the largest. The other major producers are USA, Australia, Russia and Peru.

World Gold Markets:

OTC markets at London (LBMA), New York and Zurich Gold derivative exchanges at New York – CME (COMEX), Tokyo (TOCOM), Mumbai (MCX) Istanbul, Dubai, Hong Kong and Singapore are doorways to important consuming regions World Gold Markets

India in World Gold Industry:

(Rounded Figures) India (In Tons) World (In Tons) % Share Total Stocks 15000 160000 9 Central Bank holding 558 30,100 2 Annual Production 3 2450 0 Annual Recycling 250 1100 23 Annual Demand 700 3550 20 Annual Imports 600 ---- ---- Annual Exports 60 ---- ---- India in World Gold Industry

Indian Gold Market:

India is the world's largest consumer of gold. Indians normally buy about 25 per cent of the world's gold, purchasing around 700 - 750 tonnes of gold every year. However, the sharp price increase in 2008 and 2009 has impacted demand with total demand in 2008 dipping to 660 tonnes . It is further expected to shrink in 2009 with demand in first three quarters of 2009 totaling only around 265 tonnes against 553.5 tonnes in the same period of the previous year. As India's domestic primary production of gold is very less, at around 2-3 tonnes a year, the country imports most of its domestic requirement. Indian Gold Market

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Thus, India is also the largest importer of the yellow metal and has averaged imports of around 600 tonnes a year. However, 2008 imports dipped to around 400 tonnes of gold and it is further expected to dip to around 200-220 tonnes in 2009 owing to high prices. India's gold demand is firmly embedded in cultural and religious traditions. It is also valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. Gold hoarding tendency is well engrained in the Indian society and unofficial stocks held by Indians is estimated to be well above 15,000 tonnes , which is around 9% of the total global gold stocks.

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Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewellery offtake is sensitive to price increases and even more so to volatility. In the cities gold is facing competition from the stock market and a wide range of consumer goods. Facilities for refining, assaying, making them into standard bars, coins in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present, 13 banks are active in the import of gold. This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001.

Factors affecting Gold price movement…:

Tightening of gold supply : Gold mining is decreasing and the demand for gold is increasing. Gold supply has decreased by almost 40 per cent as the cost of mining, legal formalities and geographical problems have increased which has led to a fall gold mining. Economics have taught us that lesser the supply, greater the demand and in turn greater the increase in price. Factors affecting Gold price movement…

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Inflation and interest rates : Gold has always been considered a good hedge against inflation. Rising inflation rates typically appreciates gold prices. It has an inverse relationship with interest rates. As gold is pegged to the US dollar, US interest rates affect gold prices. Whenever interest rates fall, gold prices increase. Lowering interest rates increases gold prices as gold becomes a better investment option vis -a- vis debt products that earn lower interest. Gold loses its shine in a rising interest rate scenario.

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Currency fluctuation : As gold is pegged to the US dollar, it has an inverse relationship with the dollar. With US being in great financial turmoil, the dollar has weakened against many other currencies. Dollar is expected to weaken further prices of gold are expected to rise further. Dollar is a de-facto currency of exchange around the world. But with US on the brink of depression, gold is substituted as a safe haven for investments. Though dollar seems to be getting stronger, it may be a temporary effect and very soon it can head southwards once again, in turn making gold an attractive and safe investment

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Geo-political concerns : Whenever there is geo-political strife, investors around the world rush to prevent erosion of their investments and gold as a safe haven attracts one and all. For example after 9/11 terror strike in the United States the demand for gold had increased. With the recent events like tension between India-Pakistan, Israeli strikes over Gaza, the ongoing war in Iraq, the tension between US , Iran coupled with recession, Libya Economic Crisis and Japan Earthquake have investors scrambling for gold.

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Central bank demand : With the dollar losing its value, central banks of most of the developed countries have started to increase their share of gold. This explains the increasing market demand for gold. Weakness in financial markets : General rule of thumb in the market is that gold is always attractive when all other investments are unattractive. Why is this? As gold is negatively co-related to stocks, bonds, and real estate, gold is considered to be a safe haven and hence during any crises, investors would like to sell off what they would term as risky investments and be invest the funds in gold.

Measurement: Weight Conversion Table:

To Convert From To Multiply By Troy Ounce Grams 31.1035 Grams Troy Ounce 0.0321507 Kilograms Troy Ounce 32.1507 Kilograms Tolas 85.755 Measurement: Weight Conversion Table


Gold purity is measured in terms of karats and fineness Karat: Pure gold is defined as 24 karat Fineness: Parts per thousand Thus, 18 karat = (18/24) th of 1000 parts = 750 fineness Purity

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