Gold coins were first introduced as currency in 560 BC, and to date remains the only currency to be ever used, which has an intrinsic value within itself. Silver, copper, and other metal coins that came in later also possess intrinsic value but none matching up to that of gold. Gold has since then been the primary form of store value, until 1971, when the dollar took over. Enter the 21st century, and the dollar seems to be slowly losing out. Some look at the euro as the next emerging world currency, yet the true big gainers have been black and yellow gold. Black gold, oil, and traditional gold have been doing exceedingly well since mid-2007, when the US slowdown shook the world?s faith in the almighty dollar. Oil reached an all-time high of $110 per barrel and gold has been above $900 per ounce since early this year.

Having gold as an investment in your portfolio seems to be a good move. It is lucrative, has intrinsic value, helps hedge against inflation, and has been the safest form of investments since 600 BC. The main reason why gold has come into the limelight again is the fact that primary investments now seem to be going through a major recession phase, the world superpower is having financial trouble, and the butterfly effect has got integrated world financial markets in a flux. Like all commodities, gold too, follows the basic principles of demand and supply that defines the market value. However, with gold, like oil, one must understand that the global scenario plays a big role.

Demand, supply and what to buy?

Demand for gold in the recent year and a half has drastically risen. While earlier most people were comfortable to accept the dollar as an instrument of store value, ever since the US recession and subprime mess, people?s faith in their economy is falling. Looking out for an alternate instrument of store value, many nations that earlier accepted treasury bonds in exchange of exports to the US are now buying gold in lieu of the dollar. Wealth funds around the world are also shifting their focus to gold and are purchasing it as a strong and safe asset class.

In India too, the last year and half has seen six Gold ETF?s (exchange trade funds) launched and there has been a surge in the investment of gold. The markets here have been in turmoil over the last few months. Almost all the sectors are experiencing a correction period and in this backdrop gold as an asset is still doing very well. As gold prices rose, Indian consumption reduced especially during the festive season last year.

However, as time has passed, people have adjusted to the new prices and the demand for gold has gone up again. Indians are the biggest buyers of gold in the world, however most of this is purchased in the form of jewellery. The biggest hassle with such a buy is that the value of gold as a financial investment is nullified by the exorbitant designing and making costs. The end result being that when you go to sell your gold jewellery, the value you receive will be way lesser than what you paid for it. Before moving on to how best to invest in gold, lets look at the supply and why will gold remain a good buy.

There has been about 1,58,000 tonne of gold mined since history and the upward trend of gold production is now leveling. In the recent years there has been no major gold discovery and even if one were to discover more gold, it would take at least 10 years before the site starts production. Keeping this in mind, one can be rest assured that the supply of gold is limited and will remain at the current levels. With supply being limited and demand surging, the price of gold has risen drastically, touching a high of 23 years. Earlier, gold prices were rising at 6% a year. However, since March 2007, when it was priced at $654 an ounce, it has sharply risen to cross the $900-mark. The prices are expected to continue rising over the next few years and touch $1400 an ounce in the future. The current demand for gold is being supplied for by the scrap gold that?s being sold at an all-time high and as of now this has brought some amount of control in the price hike. However, this cannot alone sustain the gold demand in the world and hence prices will soon rise sharply again. A majority of the world?s gold comes from South Africa. As the nation has been facing power supply and generation turmoil lately the global gold production has reduced. This again has had a major impact on the gold supply and has been a catalyst to the escalating prices.

Gold is currently available in the form of jewellery, bars, biscuits, coins, futures, and Gold ETF?s. While jewellery, due to high ancillary costs, is not the best investment; bars, biscuits, coins and futures have drawbacks too, which one must consider before investing. The main hassles faced by investing in these forms of gold are that before doing so one must verify the authenticity of the gold. Insurance, safety, higher rates of wealth tax, and capital gains tax are other hindrances. In case of futures, knowing the ins and outs of the gold market and knowing the factors affecting its prices are a must. Considering all of these, the safest and maybe most lucrative investment into gold is the Gold Exchange Trade Funds in the market.

Gold ETFs or ?Electronic Gold?

Beginning 2007, there have been 6 gold ETFs that have been launched in India. However, one year since the launch of ETFs in India, their success has been limited due to cumbersome laws governing the trade, and passion among Indians to cling to gold in the physical form. The country currently has five gold ETFs (UTI, Benchmark, Reliance, Quantum, and Kotak) listed on the National Stock Exchange. Gold ETFs are open-ended mutual fund schemes that put investor money in standard gold. Investors? holding is denoted in units, which is listed on a stock exchange. These funds put together hold just 4-4.5 tonne of gold. According to the World Gold Council, Indian households own about 15,000 tonne of gold, comprising around 10% of global stocks.

However, most of it is either stacked in bank lockers or kept as jewellery at home. India, the world?s largest importer and consumer of gold, annually buys around 800 tonne mainly from Switzerland and Australia. Lower costs, lack of purity issues, easy liquidity, no transportation charges or storage problems. and tax savings on capital gains tax make gold ETFs attractive. If you redeem your ETF units, you get the equivalent price of gold at that time, whereas when you sell gold you get a 10-15% discounted price after deducting making charges, etc. Analysts cite lack of awareness on the working of ETFs and complicated investment norms as the reasons for gold ETFs not picking up in India. DSP ML?s world gold fund is slightly different from other funds in the market, as this fund essentially invests in gold mining companies around the world and hence, has very little direct gold investments. Thus, their NAV will always be lower than the other funds, due to this indirect nature of investing in gold.

Gold ETFs not being embraced as widely as hoped is rather sad, for this is a lovely innovation in the Indian mutual fund market and the faster one realises this, the better. With gold spot prices being at an all-time high and this being such an easy way to hold gold, people should have at least 10-15% of their investment portfolio in gold. Gold ETFs not only allows all to invest in the yellow metal but also gives you a defense against failing markets and economic turmoil. With new funds like the Quantum fund offering you approximately half a gram of gold as underlying for every unit, one can be rest assured that this investment is here to stay and will never leave you empty handed. The average return of gold from 1995 to 2008 is 12.69%, while the inflation rate during that period is 5.24%. Thus we see that gold is also a perfect hedge against inflation no matter what. Going gold now will pay rich dividends in the future. It will diversify your portfolio, give you defense in market turmoil, and always tilt the scales to your side.