Why the smart thing to gift your wife is gold

Despite gold prices making all-time highs almost on a weekly basis of late, experts reckon that the price of gold could still top $1,500/oz before the end of 2010, and recommend buying gold.

Gold exchange-traded funds (ETFs), which track physical gold prices, are generally considered a less riskier option of investing in gold as it doesn’t entail the storage and security hassles associated with holding physical gold.

However, counter-party risk (the one that triggered the demise of Lehman Bros) is being cited by experts as a reason to shun ETFs and hold the bullion in jewellery or gold coins and bars.

“With the rapid growth of ETF as an investment option to invest in gold, many investors have started investing in Gold ETFs. However, post financial crisis, even ETFs are not immune to counterparty risk,” M.R. Raghu, Senior Vice President – Research, Kuwait Financial Centre (Markaz), told Emirates 24|7.

“Hence, the best way to have gold exposure is to own it physically,” he advised.

Gold ETFs have claimed an increasingly important share of the gold market and are likely to continue registering net inflows for the rest of this year and next.

“The global financial crisis has elevated gold as an asset class for many investors. The resulting impact is that investors (including institutions) today have a good chunk of gold in their portfolio (ranging from 5 to 10 per cent) as against no exposure at all to this commodity a few years before,” says Raghu.

“Obviously, it reflects the cautious approach of investors not yet seeing clarity in terms of global economic recovery. Added to this is the huge demand by Gold ETFs, which saw prolific growth in their assets under management during the last one year. For the year, the shiny metal is up by 18 per cent and year on year it is up by 30 per cent,” he says.

According to BNP Paribas, global ETF gold holdings are estimated at around 2,100 metric tonnes as of mid-September 2010. According to Kitco, global gold ETF holdings in October last year stood at 1,750mt, suggesting a 250mt increase in the past 12 months.

“Having touched $1,300, the upside potential from here may be limited though I see no downside risk,” Raghu says.

“Investors willing to commit to this new asset class may do well to buy and gift gold jewellery for their wives generously, as physical gold is any day more safer than paper gold (read ETF) given the fragile state of counter-party risk these days,” Raghu adds.

Nevertheless, some other disagree. Kamal Fayed, an advisor with KAF Investments, insists that ETFs “are more liquid for trading and still hold a guarantee by the exchange.”

While he admits that, “for individuals, it is always good to hold physical jewellery and gold, it is not in comparison with the needs of an institutional investor, with the problem for security and storage, transportation, etc.”

“I would like to buy jewellery for my wife but I would not store 10kg of gold in my house or even in a bank where my counter-party risk will be higher,” he shrugs.

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