Is Gold Still A Good Investment Option

Is gold still a good investment option?
For Gopal, it was the yellow metal that added glitter to the portfolio. At a time when the markets were choppy and debt instruments not so lucrative, Gopal made a neat 18 percent profits on gold. That was within a short span of a year. Gold and silver were a significant part of his portfolio. He used them as an efficient hedge against looming uncertainties. Will this strategy work again for Gopal? The often-heard term 'inflation' is the rate at which prices of goods and services rise. It eats away the future purchasing power of the wealth you create painstakingly through meticulous investments. If you find it difficult to meet your monthly expenditure, blame it on the inflation monster. Gold and realty were often considered a good hedge against inflation. The inflation-adjusted returns from gold have been spectacular over the last few years. You can invest in physical gold in the form of bars, coins or jewelry. Gold exchange-traded funds are equivalent to investing in gold and easy to liquidate. Undeniably, gold is an excellent way to diversify your portfolio and is useful in times of high inflation to protect wealth. However, while it requires no additional maintenance expense, it doesn't generate any periodic interest payouts. Unlike silver that has extensive industrial applications , gold is more often preferred in physical form. People have an emotional bonding to the metal. They usually keep it safe for the next generation and for times of financial crisis. Will the uphill climb of gold prices continue? The fluctuations in oil price and strength of the US dollar have affected gold prices. An increased demand for gold, especially before the festival and marriage seasons , pushes its price upwards. Gold is pegged to the US dollar and has an inverse relationship with the dollar. In the event of a financial or economic turmoil in the US, the dollar could weaken against many other currencies, sending the gold price upwards. Political turmoil across the globe could send the gold price upwards too. Will the price of gold go up higher? Or will it stagnate at the current levels? Analysts advise the riskaverse not to invest more than 10 percent of the portfolio in gold at the current price level. While the benefits of diversification may be real, the associated risk is high too. Those with a low or medium threshold for risk should look at other safer options such as fixed deposits that are yielding lucrative double-digit returns
Why the price of gold reached a historic high

Gold always shines. No one disputes that. But the amount of glitter it has exhibited lately is unprecedented. The price of gold touched unprecedented heights. In fact, for many, it has now become unaffordable. But what gave this glitter to gold? Gold is a safest investment avenue. However, the metal does not have any revenue-generating capacity as such. It is its own value that makes all the difference. Gold has been the favourite option for many to park money in. As a result of the recent crisis in the global markets the price of gold has gone up sharply and touched a record high of 1,685 dollars per ounce in the international markets. Here, gold has already crossed Rs 25,000 per 10 grams.
Safe haven factor The main reason for this abrupt rise in the price of gold in the international markets is its safe haven character. The price of gold shot up sharply because of the recent uncertainties in the global markets. This has been compounded by the volatility in currency rates. In the case of the stock markets, when the prices of shares are dropping , investors look for safer options. Gold has traditionally provided a safe haven for investors. So, many investors buy gold as a safe instrument to park their money in. High returns Then comes the question of returns. Although historically, gold may not have offered immediate high returns, of late, the metal has defied that trend. The recent spate of increases in the price of gold have been quite abrupt and surpassed returns from many other investment avenues. So, investors have been able to get good returns from their investments in gold.
Is there a gold bubble now?

After reporting consistent gains for the past 10 years, gold continues to be the best performing asset this year as well. The year-to-date return is a whopping 35% as the price of gold touched an all-time high of Rs 27,840 per 10 gm on 19 August. While new investors and speculators are rushing to benefit from this 'golden harvest', seasoned players have already started raising an alarm. "Gold is getting into a bubble territory. Though the short-term uptrend may continue due to the ongoing sovereign crisis in the US and Europe, it can burst any time," warns Prithviraj Kothari, president, Bombay Bullion Association. So investors need to be cautious. While it is the 'safe haven' demand that is propping up gold, investors need to keep in mind that this is not a risk-free market. Gold had crashed to $260 an ounce (nearly 69%) after hitting a peak of $850 in 1980. How long will the current rally continue? "Gold may remain strong for the next 6-9 months, but once things stabilise and other markets start doing well, money will move out of gold. After three years, gold prices may be lower than the current level," says Kishore Narne, head, commodity, Anand Rathi Financial Services What Here's US a look is at some triggering crises that are the driving the gold gold market rally? now. crisis:
One of the causes has been the downgrading of the US sovereign debt to AA+ from AAA, a rating it had held for the past 70 years. The efforts by the US government to support the faltering economy is another reason. For instance, rising interest rates usually lead investors away from gold. However, the decision by the US Federal Reserve to leave interest rates close to zero for two more years will boost the gold market. Euro crisis:
Several European countries, such as Portugal, Ireland, Greece, Spain and Italy, may be forced to default in the short to medium term. Their efforts to reduce spending and increase taxes are being hampered by a faltering Eurozone economy, which grew by just 0.2% in the second quarter, its worst performance after emerging from the recession in 2009. There are also concerns about the ability and
willingness of relatively stronger countries, such as Germany and France, to support the troubled ones. Currency crisis:
As two major economic blocks (US & Europe) suffer problems, central bankers of several countries have started losing faith in their reserve currencies and have decided to buy gold as an alternative. For instance, in July, Thailand, South Korea and Kazakhstan added gold valued at $2.56 billion to their reserves. Falling consumption demand
While the investment demand is shooting up (holdings in exchange-traded products backed by gold rose to a new record of 2,217 tonnes on 8 August), the consumption (jewellery) demand is on the wane. According to the recently released World Gold Council report, the global gold demand in the second quarter of 2011 came down by 17% y-o-y to 919.8 tonnes.
Gold a 'bubble that could deflate,' says analyst

KOVALAM: Record gold prices may be heading for a correction of about 8 per cent next month, but the safe-haven metal may also rally to $2,400 an ounce next year as investors seek refuge amid global economic turmoil, a global head at INTL FCStone on Saturday. "Trees don't grow till heaven. I think buyers need to be beware. we are in a 'caveat emptor' market," said Jeffrey Rhodes, global head of precious metals at the brokerage and an industry expert, told reporters at a conference on gold in the southern Indian state of Kerala. International gold struck a record of $1,877 an ounce on Friday, still on track for its biggest one-month rise in nearly 12 years in August and its biggest one-week gain since early 2009. Rhodes said gold may retrace to $1,725 by next month, and then race ahead. "My problem is that people are buying gold and they don't understand why they are buying gold and that's a big problem and that is a classic symptom of a bubble," said Rhodes. Rhodes said there is an absence of "real motivation" for investors to cash in their gold holdings to cover losses from the equity markets. On Friday, global equity markets slid anew and gold set a second-straight record high as fears of a possible U.S. slide into recession and concerns related to Europe's debt crisis kept investors on edge.

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Is gold still a good investment option?

Why the price of gold reached a historic high

Is there a gold bubble now?

Gold a 'bubble that could deflate,' says analyst

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