Gold

It's an excellent compendium of links, articles and opinion on Gold. Some points:

• Gold, considered a hedge against inflation, does well in deflationary environments too. And if the environment involves devaluing currencies it goes up - like the purchasing power of gold did during the Great Depression and in the last 10 years.
• There's some evidence that while gold loses some sheen in the early part of a deflationary period, it climbs in the later part; the Yen-Gold chart is provided.
• Short term interest rates near 0% are good for gold.
• Government distrust - of the type happening in the US (we in India have never trusted our governments) - is positive for Gold.
• It's the currency-of-last-resort, so panics induce buying.
• China will buy dips and effectively put a floor on gold prices.

The International Monetary Fund has approved a sale of 403 metric tonnes of gold reserves, in a move likely to raise $13bn (£8bn) of cash to replenish its coffers for lending to low-income countries hit by the global economic downturn. The sale amounts to roughly an eighth of the institution's stockpile of the precious metal and comes as gold prices hit record highs, boosted by investors seeking safety away from volatile stockmarkets.

China is thinking of buying from the IMF. Given the 2.2 trillion of the increasingly value-losing dollar reserve, China needs a hedge or a way out. They say they'll only buy at a big discount, but it's not a big deal: the $13 bn this will generate for the IMF will not do much to diversify the reserves. Given the $10-15 billion in gold traded per day, they wouldn't be able to get a lot of gold out from the real markets even if they wanted, and that would really drive up prices. China's diversification strategy includes commodities of all sorts - they have stockpiled everything from iron ore to aluminium and copper. Still, nothing that can make a serious dent on the $2.2 trillion they hold.

India might also pitch in - and try to buy a part of this to keep the $280bn of reserves in gold (only $10 bn is currently in gold).

What this will do is temporarily set up a floor price on gold, as a good friend told me yesterday. Gold just crossed $1000 an ounce, and in India trades at 1600 rupees a gram (though Goldbees, the ETF, trades at 1575).

The total amount of gold ever mined is the order of 150K tonnes. That at $1000 an ounces is about $4.5 trillion. To give you context, the amount of money in print in just the US is about $8.3 trillion. It's unlikely that this precious metal will be able to hedge dollar exposure very much, but you can bet that some countries are going to give it a shot.

Supposedly its because of wedding season. How silly. It's the same funda that took Oil to 147, Sensex to 21K and bonds to record prices - investors piling on. Time will tell if it's real or not. For the time being, I'm sticking with it, like I'm sticking with bonds.

Unfortunately, most of us think quite like Mr Gupta. That is, if we had purchased gold at, say, Rs 10,000 (per 10 gm) and if today it has touched Rs 13,500, it’s a clear cut 35% gain, no matter from where we bought it and what is the purity level, only to be wronged when we actually go to sell the yellow metal in the market. Gold is trading at an all-time high of $1,000-plus an ounce in the international market and has touched the 13,500-mark in the domestic market. This is encouraging people to liquidate their possessions, just like Mr Gupta. Few jewellers even claim that in the past few months, they have seen more people coming to sell gold rather than buying it.

There are some misconceptions as to buying gold. The common one being that a person wouldn’t be duped by ‘his own’ jeweller just because he has been buying gold from the shop for a long time. Take the case of Ms Anamika Singh who had purchased a gold chain (billed for 22 carat) from their ‘old common’ jeweller in her vicinity. Recently when she got the gold chain’s purity checked by a caratage machine, it was just 18 carat — a loss of 18%, it’s like paying Rs 100 for Rs 82.

According to a Bureau of Indian Standards (BIS) 2006 survey, 90% of non-Hallmarked jewellery failed the purity test. In few instances, the shortage of purity was as high as 45%.

...

Speak to most of the non-Hallmarked jewellers, and we find that it’s common to deduct anywhere between 10% to as high as 25% from the total market value.

• They'll sell you lower purity than they say.
• They'll charge you "making charges", a substantial sum, plus "wastage", which is overinflated. [From my experience of selling software to a jeweller]
• When you want to sell, they'll buy back only at the lower purity level, and then charge you a further 20% discount.

• If you buy from a jeweller without the BIS mark, you may get impure gold.
• If you buy BIS marked gold, the jeweller may charge you high costs for buying it back.
• If you buy from a bank, the bank will NOT buy it back. You then have to go to a jeweller who will charge you big money.
• And if you buy it, you have to store it somewhere and you have the risk of robbery. Security then costs you some maintenance charge.

How to buy? In your online brokerage site, you can choose the symbol GoldBEES in NSE (there are Kotak, Quantum and Reliance Gold ETFs too) and buy. (You can also tell your broker if you have an offline account) Prices are linked to 1 or 1/2 gram of gold, in rupees.

The underlying gold is stored carefully by the ETF issuer and they take care of security etc. You don't have to worry about purity, the issuer guarantees it. And if you need to have physical gold, just sell the units and buy gold in the market. The difference is not likely to be much.