The Bullion Angle: Idle Asset Or Great Investment Option?

Circa 2003, everyone, including this magazine, thought gold had reached its peak. The yellow metal's price shot up to $372 an ounce (Rs 17,112 at the then exchange rate) and the universal opinion was that it was unlikely to go any higher. Well, we were all wrong

January 2004 was a great year for gold: prices rose from $343 an ounce on January 1 to $416.25 on January 31, reaching a 15-year high. More importantly, the domestic price of gold on April 13, 2004 was Rs 6,040 for 10 grams, up from Rs 6,010 on January 31, and just 4.88 per cent off the all-time high of Rs 6,335 registered on January 12, 2004.

Gold's intrinsic value as an investment vehicle is considerable. "It is a good hedge against currency fluctuations," says Hiroo Mirchandani, Vice President (India), World Gold Council. That makes it a must-have in any investment portfolio, a point of view that most investment advisors are now coming around to. K.V.S. Manian, the head of retail liabilities at Kotak Mahindra Bank, for instance, advises his customers to build a diversified portfolio that includes gold. "Gold generally has a negative correlation with other asset classes, debt and equity."

However, given the age-old Indian approach of hoarding gold rather than trade in it, there aren't too many gold-linked products around (SBI and ICICI Bank are the only banks offering such products). The market exists: "Last year, we sold 123,000 ICICI Bank Pure Gold pieces," says Anup Bagchi, Joint General Manager (Retail Liabilities Group), ICICI Bank. With other banks mulling the launch of gold-denominated certificates, it may soon be possible to trade in the yellow metal. You should.

-Ashish Gupta

Should you invest in commodities?

Yes. And here's why: diversification into commodities can help investors reduce their overall risk. Smart investors have always been aware of this and made surrogate investments in commodities. Direct investments in industrial commodities such as steel and aluminum and agricultural ones such as rubber and pepper requires a sales tax registration and a warehouse. However, commodities futures now make direct investment in paper-commodities possible. Investors can choose from three exchanges, the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd, and start with an investment as low as Rs 5,000. Several equity brokers have diversified into commodities trading and the process itself is fairly similar to equity trading (down to the extent of possessing a DEMAT account). Even better, as long as trades are squared off, and there is no delivery, investors do not have to pay sales tax . "If you expect steel prices to go up, just buy steel (futures) instead of steel companies," says Satish Menon, Chief Operating Officer, Geojit Securities. Caveat: it takes some expertise to make money from commodities. For instance, investors would do well to avoid buying into bullion now. "At the moment the price is on the high side and it makes sense to wait for the correction," says Harmesh Arora, Vice President, Bombay Bullion Association. Like gold, most commodities go through cycles and an understanding of these could prove invaluable.

-Narendra Nathan