Gold has been a natural currency of the world for a very long time. Its scarcity, widespread acceptability and high demand make it a highly valued metal.

Given the historical and current pervasiveness of gold as an asset, it continues to be seen as a storehouse of value and, to a certain extent, medium of exchange of last resort. So, it isn’t surprising that gold has also been called as “money by other means”. Therefore, as is the case with cash, the demand for gold tends to rise during adverse economic conditions, market volatility, rising inflation, weakening global currencies, or general socio-political instability. Thus, while “cash is king, gold is the crown on the king’s head”.

Buoyant metal

Gold prices have run up by around 20 per cent year-on-year over the past 10 years. The turbulent economic conditions after the outbreak of the sub-prime crisis contributed to the gold rally; the uncertain global economic environment since then underpins the optimistic outlook on gold.

After a small hiatus, gold has again begun to see a renewed upward trend in its prices, not just in the rupee but also in dollar terms. The slowdown in China, the European Union and the US is evident. In this increasingly sombre climate, the demand for gold tends to be higher.

Monetary easing in developed nations is also assisting this gold price buoyancy. The bond-purchase support by the US Federal Reserve and the European Central Bank (ECB) is indicative of the monetary expansion underway. The increased money supply has the natural consequence of leading to inflationary pressures and erosion in that currency’s ability to command a price. Naturally, informed investors have scrambled to change their asset allocation ratio, especially in favour of gold, to protect against this anticipated erosion.

Buying of gold by central banks also remains a strong theme. In the last quarter, the central banks of South Korea, Russia, Brazil and Turkey added gold in their reserves. Central banks have been net buyers for two straight years and purchases this year will probably exceed the 456 tonnes added in 2011. The strong investment demand world over and the start of seasonal buying of gold will provide a strong upside for the yellow metal in the coming months.

Along with that the turbulent geopolitical climate in West Asia and South China Sea may also provide support to gold prices.

Stable factor

Given the potential buoyancy in the asset, investors are advised to allocate a proportion of their investments in gold. The “low-to-almost-non-existent” corelation with other asset classes such as equities and debt provides gold the characteristic of an anchor even when the other two assets may not be performing well. Thus, gold helps to stabilise the overall portfolio and provides a possibility of growth even in a recessionary environment.

Thus, the monetary expansion, geo-political issues, institutional demand and prudent allocation requirements continues to fuel the investment demand for gold.

But from a retail investor’s point of view, the physical investment in gold has a minor, negative side-effect. Buying physical gold involves the risk of theft, misplacement and potential mispricing.

Additionally, when an investor needs to sell his physical gold, he or she has to go through the inconvenient route of valuation, bargaining, transaction and delivery.

All these angles involve risk, skill, and time, making the whole process inconvenient. But thankfully an alternative method of investing in gold exists. The gold exchange traded fund (GETF) is a good option without the inconvenience of a physical transaction.

Convenient form

Gold ETF is nothing but pure gold, traded online through a medium of exchange. Normally, each unit of gold ETF is worth approximately 1 gram of 24-carat gold at any-point of time. GETF allows the investor to invest in gold without bothering about its purity, security or the liquidity of the investment that is attendant with gold hoarding. Also GETF’s online tradability and transactability gives it the features of a stock, making buying and selling an almost intra-day affair!

In other words, GETF gives you the ability to buy, sell, or hold gold at your convenience. This idea is relatively new in India but has caught on in a big way in the rest of the world. In India, too, with rising awareness, gold ETFs are gaining ground.

There is a downside however: an investor in GETF must have a demat account. This mandatory requirement excludes a large segment of investors from benefiting from the growth potential of gold. To circumvent that, we have devised a mechanism under which the investor can invest in gold like any regular mutual fund scheme. It would also enable the investor to conduct an SIP in gold (through a proxy). We call it the gold fund of fund (FoF).

In simple terms, the gold FoF collects the corpus from the regular investors and invests the same in a Gold ETF. In lieu of the same, the investors of the gold FoF are provided a commensurate value of units in the folio. This mechanism ensures that investors obtain a stake in gold without the necessity of a demat account. Given this facility, investors can plan a long-term investment in gold at an economical cost.

As you can see, there is high investor acceptance for gold schemes. The momentum will continue as more investors realise the convenience and tax-efficiency of gold purchases through this route. Happy investing!

The author is head-products at Kotak Mutual Fund. Views expressed herein are her own