?All that glitters is not gold, often have you heard that told,? William Shakespeare said in his play The Merchant of Venice. Similarly, investors may now be weary of investing in gold and other precious metals, fearing most are past their peaks. While volatile markets, a weakened dollar, and uncertainty surrounding precious metal prices has caused panic amongst investors, one would be foolish to completely right off this time-tested asset class.
Interestingly, aluminium was once the most precious metal on earth. It was more expensive than gold, silver or platinum and was very difficult to find in its rare form, and, even harder to extract. The Hall-H?roult process discovered in 1886, made it possible to extract aluminium on a large scale, causing it to eventually lose its precious metal status.
Diwali is here again and most Indian households are looking to stock up on their gold, silver and other precious metals collections. However, what really constitutes a precious metal, why is it considered one and is it in the given situation a smart investment to make, are questions investors often leave hanging in the air, when purchasing these metals this season. Rhodium, found in platinum ores, is by far the most expensive precious metal and is used in alloys with platinum and even as a catalyst.
While this year has been the most eventful of the millennium for precious metals, the yo-yoing prices have made many an investor believe that this as-such safe asset class is losing its steady touch. However, experts within the industry reckon that now that the prices have passed their peak and come back to last year?s prices, the investment value that these assets provide has increased. Amongst the metals, while silver and gold have been widely speculated and spoken about, the biggest jumper of the lot was platinum, which, from $1,500 went all the way up to $2,100 per ounce, before falling back to a little under a $1,000 currently. Technically, economics favour precious metals as an asset just like real estate, since the increasing demand and reducing supply always lead to better prices in the long run. However, liquidity crunch, credit crises, and growth blocks like inflation, uncertainty and fear have led to people shying away from this asset class in the last month. This has led to a major drop in returns for Gold ETFs in the last one month, leaving only Benchmark?s Gold BEES fund with positive returns. However, if one is to look at their performance from the beginning of the year, they have still maintained healthy returns of between 15-20%, which one should not ignore.
Keeping trends, prices and economic factors in perspective, if one is to analyse metals like gold, silver, platinum and others, as investment options this Diwali, one will see, amidst the dark clouds threatening our piggy banks, there is a silver lining, which we at FE Investor bring to light this festive season.
Gold: highs and lows
Gold has been through a lot this year, it has touched an all-time high and now with the liquidity crunch and fear gripping even the most optimistic investors, prices have slipped back down again. The recently-concluded World Gold Council meet in India, tried reinforcing the position of gold as an investment option. Speaking on the same, Marcus Grubb, managing director, investment research and marketing, World Gold Council said, ?Gold is an irreplaceable part of Indian culture and a unique monetary asset. In light of the current financial crisis, the problem of credit over leveraging the derivatives has affected people?s portfolios. Gold?s real value is not that it provided a quick speculative fix, but that it offered a sure and steady means of protecting wealth. Gold is an attractive investment that should form an important part of ones investment portfolio. The investment characteristics this metal shows, makes it a relevant asset for all investors, whether private individuals or institutions?
While Marcus was right in his overall judgment of gold as an asset class, the fact remains that in India, gold prices are not just affected by the overall economics of the globe, especially since we have a very strong parallel or black market as well. This market has deep pockets and gold is a preferred asset class amongst them. In fact, India is the world?s largest gold consumer and purchaser, holding 13,000 tonne of gold, approximately 9% of the global share.
Ajay Mitra, managing director, World Gold Council Indian Subcontinent adds, ?Gold continues to remain the most universally accepted and time-tested asset class. As a global currency, it has proven its ability to preserve value over time and act as an effective portfolio diversifier. The value of gold in terms of real goods and services that it can buy has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined. Gold has consistently reverted to its historic purchasing power parity.?
Gold has remained a universal denominator for value since it was first discovered. While this metal as such generates returns of somewhere between bonds and equity, the stability it provides exceeds that of bonds as well. While governments and countries have lost their way, over the last few centuries, mankind?s fascination for gold has remained. It is still rare and hence highly valued.
Ajay Bagga, chairman, FPSB India says, ?Indian masses have bought and sold gold since ages, solely from the standpoint of a valuable commodity and a ?store of value?. Gold as an asset class for investment requires conversion of gold into a monetary asset to deliver the virtues of liquidity and transparency in price discovery.?
Gold is currently valued at Rs 11,456 per 10 grams and is down from its all-time high of over Rs 13,000, making it a commodity worthy of investment consideration again. While people might still shy away from gold due its falling prices and liquidity concerns amidst market turmoil, the intrinsic value and storage value of gold both remain high. While gold has been pitted against the once-mighty dollar over the last few decades, the uncertainty surrounding the dollar, only further proves gold?s worth as a risk-free investment and asset worth holding onto and building on. Gold exchange traded funds too have since their recent inception in India, caught investors fancy and rightfully so, being the best performing mutual funds over the last one year, giving returns of 15-18%.
So while gold has over all had a see-sawing year, history so far has always vindicated man?s belief in this asset. Thus, this Diwali, investing in gold may not be as bad an idea as some suggest, for it may bring the much needed Laxmi so many seek.
The silver lining in your portfolio
Silver has always been looked at as gold?s younger brother. The two metals have similar characteristics. However, gold has always been higher valued than silver. While Indians and many other ardent believers in gold?s superiority do not look at silver in the same light, global trends and indications do point towards silver as being a good investment to make this season. In the global markets, silver prices have jumped by almost a 106% in the past two and a half years and have made rapid strides over the last year itself. Silver offers us protection against inflation and market turmoil like gold, and the prices of the two metals too, often move parallel to one another.
James Turk, founder of GoldMoney, had said in his annual forecast, ?The US economy will get much worse in 2008, making gold the premier asset of choice, but not the best-performing precious metal. That honour will go to silver, which I expect will clear $30 in 2008″
While this statement may leave many doubtful of the man?s psychic abilities, there are some interesting points, which show us how silver in the long run is a very good asset to hold, as good if not better than gold in some aspects.
For the last 18 years straight, the world has consumed more silver above ground, than we?ve been able to extract from below ground. While the same is true for gold, this occurrence has only happened in the last 4 to 5 years with gold. This clearly shows that economics in general will always tilt the demand and supply of these metals to increasing prices. One of the main reasons for this is that it is ironically thought that only a portion of silver demand comes from investors. The commercial demand for silver, such as for jewellery, electrical conductors, photographic film or disinfectants form a bulk of the demand.
While gold has been hoarded by central banks, there is no similar above-ground supply of silver. Therefore, it must always be mined when needed. This in a way stems the supply of silver to what is being mined, without the fear of a large load suddenly being offloaded in the market, causing prices to fall. The industrial demand for silver is what has kept its demand high, irrespective of the crisis. For more than four thousand years, silver has been regarded as a form of money and store of value. The price of silver has been notoriously volatile as it can fluctuate between industrial and store of value demands. At times this can cause wide-ranging valuations in the market, creating volatility. Silver often tracks the gold price due to the store of value demands, although the ratio can vary. The gold/silver ratio is often analysed by traders and investors. The beginning of the year showed silver priced at Rs 19,194 per kg, post which the price surged remarkably, touching a high of Rs 25,735 in mid-July, before falling again to languish in the Rs 16,000?s. While this sudden up and down movement may leave investors weary, one should look at this fall as an opportunity to purchase silver again, before another boom in its price.
Platinum and other rarities
While gold and silver are the most widely traded and popular precious metals, other metals too come under the precious metals purview.
These include the platinum group metals: ruthenium, rhodium, palladium, osmium, iridium and platinum, of which platinum is the most widely traded.
Rhenium is another precious metal that is not part of the platinum group or any of the traditional precious metals.
Platinum, thanks to the efforts of the Platinum Guild International?s hard line marketing campaigns in the last couple of years, has now emerged as a traded precious metal in many parts of the globe.
While this metal has essentially being used for ornamental purposes in India, it is slowly emerging as an asset to invest in as well. In India, platinum has only very recently being traded seriously, and since June the prices indicate some fluctuations at the higher end, before drastically falling in the last 2 months.
Platinum, which started off with so much vigor and promise this year, unfortunately succumbed to the global economic pressures like its compatriot precious metals. Reaching a high of Rs 29,022 per 10 grams early in July, by the middle of the month after a brave struggle, the prices slumped without a halt, plummeting all the way to Rs 13,010 as of October 24, 2008. While this is the least rosy picture one could paint for platinum, the fact remains, this is a precious metal. It is extremely rare, worth a lot intrinsically, defines simplicity and extravagance, forms a style statement amongst many and remains an asset. The only positive this price drop gives future investors, is that it provides a good platform to start investing.
Sameer Shah, vice president, Ridhi Sidhi Bullion Ltd, told FE, ?I think this
Diwali is a very good opportunity for investors to invest in precious metals. It has come down from the previous 14,000 mark to around 11,500, with a downside of 10,800 at the most. The market is very positive looking from an investment point of view, and we are recommending gold and silver currently. Platinum and palladium, which are traded, unfortunately are very restrictive in nature and not as easy moving or liquid in India. This is attributed to the lack of interest shown by most people in platinum or palladium when compared to gold and silver.?
Sameer?s views pretty much sum things up in the current market conditions, since gold and silver still maintain hopes of stability and rise, while platinum and palladium, due to their obscurity in India, have failed to impact the markets in any way. Precious metals may have passed some remarkable highs over the last year before falling back to levels befitting struggling economies and liquidity problems. However, they still remain invaluable as an asset and deserve a position in ones portfolio, for while economic turmoil may have lost them some glory, they, in no way lack lustre, for their true value comes from within.