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29 March 2024

The golden truth

(EB FILE)

Published
By Veathika Jain

Renewed interest in bullion from investors and central banks – especially China and Russia – has once again highlighted its importance as a portfolio diversification tool in difficult economic times.

To help investors decide if they should take advantage of this golden trend, Emirates Business asked a panel of experts for their views.


How does one make a profit out of gold and what is the recommended time period to hold it?

Patil: Gold investment can take many forms and some investors may choose to combine two or more of these for flexibility. The distinction between buying physical gold and gaining exposure to movements in the gold price is not always clear, especially since it has always been possible to invest in bullion without actually taking physical delivery.

Wozniak: There is no recommended length of time to hold gold – the duration of your investment will depend on your overall investment strategy. But it could be argued that some exposure to gold is recommended for as long as you wish to benefit from the security and protection it can provide.

Is now the right time to buy gold, and if so why?

Watson: Now is not a great time to buy if you are seeking quick gains as the price has spiked dramatically in the past couple of months as people have moved away from traditional savings schemes.

Unni: If someone is buying gold purely for investment purposes with a time frame of about three to five years, at current prices, it's the right time to buy. But the investor must have enough capital to hold on to the asset over the time frame.

A lot of people have bought gold during the economic slowdown. How long do you think this bullish rally will continue?

Wozniak: Gold is expected to remain a popular investment due to its role as a safe haven and protector of wealth. Prior to the credit crisis many investors did not regard gold as a mainstream asset. However, this is now changing. Gold has shown that it can play the role of crisis insurance in portfolios, providing access to liquidity at a time when other assets have fallen sharply in value and may be difficult to sell.

Unni: There has certainly been an investment craze in the bullion markets recently and that has been entirely on the back of the global financial instability and associated risks of parking funds in other asset classes. If prices remain firm we will see the level of investment growing as we progress through 2009, which might push prices further north. In a nutshell, a sustained uptrend in gold is a distinct possibility.

Which factors influence retail consumers to invest in gold even during a recession?

Watson: People traditionally turn to gold when confidence is low in the banking sector. People worry that their money may not be safe with a bank, so they move it to gold as it is a tangible asset. This is not advisable, though, as you are much less likely to make a profit.

Gavankar: Gold has always been a very safe form of investment. Unlike equities, bonds and other document-related investments, gold is 100 per cent safe. If equities and bond prices crash the return is zero as these types of investments are highly volatile. Even if gold rates go down they will drop marginally for a very short time and then go up again. There is no depreciation in gold as the rates have a uniform international standard, which makes investors feel secure.

What is the secret behind gold's consistent appeal compared with equities, bonds and other investments?

Patil: For thousands of years gold has been valued as a global currency, a commodity, an investment and simply an object of beauty. As financial markets developed rapidly during the 1980s and 1990s, gold receded into the background and many investors lost touch with this asset of last resort. Recent years have seen a striking increase in investor interest in gold.

Watson: Although we are seeing an increase in the price of gold, if you review the increase over the past 25 years inflation alone would have overtaken much of the original investment. However, at times of crisis many people turn to gold because they believe it offers more security and is a tangible asset.

Hansen: Gold has been used as a hedge against inflation and uncertainty created by governments' aggressive intervention. It is a tangible commodity that is always perceived to hold value no matter what happens.

How do coins and bars compare to jewellery?

Hansen: Coins and bars have greater value as the investor does not pay for the actual time that goes into making the jewellery. This is why investors prefer bars and coins.

Unni: The key difference between coins, bars and jewellery is the quality of the gold. Usually coins and bars are 24 carat gold while jewellery is 22 carat.

Gold buying is very seasonal. If someone wants to invest in gold what are the peak seasons they should avoid?

Hansen: The fourth quarter is the Indian wedding season and the physical market is generally very busy up to and into that period as India is the world's largest user of gold. So the price and demand for gold at that time of the year is high.

Unni: An analysis of data from 1970 to 2009 suggests that prices slide towards the end of March. The initial three months of the year have always been volatile with a gradual uptrend. Beyond that prices have been range-bound with markets oscillating in extreme ranges. A closer look at the average prices reveals that they have been seasonally high in the months of October, November and December and in the early part of the New Year. The ideal buying levels for long-term investment are usually seen towards the end of Q3 or in early Q4.

Things to keep in mind when investing in gold?

Gavankar: Customers should focus on buying certified gold bars from approved mints. For investment in commemorative coins, customers can always choose the Vision of Dubai gold coins that have been conceived and made in the emirate by a certified mint.

How do gold funds compare with buying gold directly? What is the risk with these investments?

Patil: Funds will cover their own set-up costs from the investment and commission paid to the broker or selling agent but the risk of the financial institution raising the fund going bankrupt has surfaced in the recent recessionary period.

Watson: It depends on what the gold fund is investing in. If it is simply investing in gold bullion then it is a more expensive way of buying gold. If, however, the fund invests in companies that specialise in gold exploration or mining they will work the same as any other investment fund.

Wozniak: The form gold investment takes is a question of personal preference and, more specifically, risk and return expectations. I would not recommend one over the other. Investing in a gold fund that will, at least partially, consist of gold-mining equity holdings will offer the investor exposure to the gold price but will include an additional set of risks – and potential rewards.

How to sell gold

Gold bars and coins can be sold to a bullion trader or jeweller across the counter for cash at the prevailing market price. The purchase receipt and personal identification must be produced.

Bars and coins will yield a premium for the investor if the seal has not been tampered with provided there is firm demand in the local market.

Gold can be bought and sold from a bullion dealer, at a retail outlet or online. It can also be bought and sold on stock markets in the form of exchange traded funds (ETFs) or securities that are fully backed by allocated bars.

Selling physical gold in Dubai isn't difficult. Most jewellers in the Gold Souk area of Deira purchase the metal from individuals after checking the quality. However, there is a discount of a few dollars from the market rate.


The experts

– Sujay Patil, Senior Manager, Corporate Banking, Diamonds and Precious Metals Unit of HSBC Bank Middle East

– Nigel Watson, Sales and Marketing Director at consultancy firm Nexus

– Ole Sloth Hansen, Futures Manager at Saxo Bank

– Mangesh Gavankar, Head of Sales and Marketing, Emirates Gold, DMCC

– Pradeep Unni, Senior Research Analyst and Trader at Richcomm Global Services, DMCC

– Rozanna Wozniak, Investment Research Manager, World Gold Council

 

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