The best stable value investment in the world for over the past 5000 years in every economic situation has unarguably been gold. In times of inflation, deflation, stagflation, recession and collapse of economies– gold and precious metals consistently keep their value as compared to pripaper money which is printed by fiat (on demand) by governments. Traditional investments in gold jewelry as an inflation hedge comes at a high premium compared to the pure metal itself. Gold jewelery doesn’t very well fit the criteria as a liquid/tradeable inflation hedge as Indian gold in the form of ornaments is notorious for being of lesser carat value than it purports to be! There are also ‘making charges’ and admixture of brass, silver etc for soldering, which can amount to a large percentage of baser metals charged at the price of gold.

Gold is limited in quantity and production while there is no limit to how much paper money any government can print, leading to easy liquidity, overspending, reduced savings, inflation and erosion of buying power of the currency. In turn, this leads to governmental panic and printing of more paper money (inflationary), juggling with currency exchange rates to protect exports (effectively preventing the currency from becoming stronger in comparison to the dollar/pound/euro); raising interest rates, removing liquidity from the market, thus effectively putting on the brakes and the accelerator simultaneously. Incidently, this is happening now.

Protection against such conditions are quite reliably offered by precious metals investments.

The advantage of this Gold fund is that it will invest mainly in units of Gold funds managed by Black Rock Investments for Merrill Lynch (http://www.blackrockinternational.com/). That International Gold & General Fund curently invests in gold (76.4%), platinum (11.1%), silver (4.7%) and other precious metal assets.

The annualized returns for this fund have been more than 21% per annum. However if we factor in that the BlackRock fund is quoted in dollars, which has been getting weaker compared to the Rupee, and that if this trend continues, the dollar getting weaker, the rupee, gold and precious metals appreciating at a higher rate–the return would be much higher. If you go to the BlackRock site a $100 investment 5 years ago has become about $270 (June 1, 2002-June 1, 2007). On a simple annualized return calculation this is a gain of 170%= 34% per year. And in our context such a return on the dividend option would be tax free income.

You can see how gold has appreciated by logging onto the foreign exchange and bullion graph of the Economist at: http://www.economist.com/markets/currency/graphs.cfm

In the first column select any date (say June 1, 2002) and in the second set the ‘Retrieve’ option as 5 years, you will find the graph shows about a 70% appreciation of gold against the rupee. The 200 day moving average for gold is at 100%, so gold is trading at a 30% discount from its 200 day moving average which is a strong buy signal for he metal.

Historically gold has been cheapest in August in India, before the festival season, marriage season, harvest time, when gold prices rise again. This is another confirmation that this is a good time to put money into gold.

If you take a 10 year period, the result is a 125% appreciation. This may not look like much but if you consider that gold is a rock solid investment over the long term allowing for fluctuations and volatility, and is well worth investing in various forms of gold instruments.

Three good investments in Gold:

The DSPML Gold Fund is a worthwhile investment now because of depreciating currencies, inflation, and the real possibility of a recession in the US markets–which affects global markets. Mutual Fund dividends are tax free, and growth units (capital gains) have tax benefits as well so one can choose the option desired. (Effectively one could end up paying no tax on the gains.)

Second, in addition to the Mutual Fund investment one could well invest in an Exchange Traded Gold Fund (ETF) such as the Benchmark or UTI Gold ETFs, which are trading in gold units like stock on the Stock exchanges (NSE and BSE). This is like buying gold bullion without the hassle of storing and protecting it etc. The gold units of these funds are backed by actual gold purchased and put in secure storage as per RBI guidelines. However since unit holders are not holding physical gold they are not assessable to pay wealth tax on this account.

The third option is investing in .995 standard gold bars/coins that have a minimum premium and are available either from dealers who have hallmarked gold or Banks such as HDFC or ICICI. The banks deal with .999 gold which is correspondingly more expensive than the .995. For all practical purposes the .995 is also quite suitable. The value of physical gold in your possession would be assessable for wealth tax beyond permitted exemptions.

Most savvy investment advisors suggest that exposure to gold and silver be limited to around 10-15% of total investment portfolio.

Wishing you well in your wealth management and investment programs.

Nalin K Nirula