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INTRODUCTION:

1.1 MEANING: GOLD

Gold is a rare yellow metal with the designated symbol AU, which is short for the Latin

word µAurum and which mean literally, ³Glowing Dawn´. The word gold, however, comes

from the Indo European root word and means simply, yellow. Gold has a number of

properties useful to man apart from its beauty and strange attractiveness for jewelry and

coinage. A very ductile and malleable, brilliant yellow precious metal that is resistant to air

and water corrosion. It is a precious metal that is very soft when pure (24kt.). Gold is the

most malleable and ductile metal. The purity of gold jewelry is measured in karats. Some

countries hallmark gold with a three digit number that indicates the parts per thousand of

gold. In this system, ³750´ means 750/1000 gold (equal to18k); ³500´ means 500/1000

gold (equal to 12k). Alloyed gold comes in many colors.

1.2 STATUS OF GOLD

History of Gold

From the first discoveries of gold in ancient times, its beauty and the ease with which it

could be worked have inspired craftsmen to use it to create ornaments, not just for

adornment, but as potent symbols of wealth and power. The first pure gold coins were

struck by king Croesus of Lydia (present day Turkey) during his reign between 560 and

547 BC and gold coins have continued as legal tender since that time. One reason why gold

is so revered throughout the world is that it¶s got such an incredible history.

Mine Production

It is known that the Egyptians mined gold before 2000 BC and the first coin containing

gold was struck in the eighth century BC. The best estimates available suggest that the total

volume of gold mined over history is approximately 158,000 tonnes, of which around

65%has been mined since 1950. Production has been on a downward trend since 2001, due

principally to the reduction in exploration budgets that accompanied the low gold price of

the late 1990s and the consequent fall in the number of major new gold discoveries.



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Gold as a R eserve Asset

Central banks have been major holders of gold for more than 100 years and are expected to

retain large stocks in future. They currently account for about 20% of above ground stocks.

The process of rebalancing reserve portfolios to adjust to changing conditions since the

demise of the gold standard has led to a reduction in the amount of gold held by some

central banks in the past ten years. This process may continue for some years to come. But

the central banks have affirmed that gold will remain an important reserve asset for the

foreseeable future and importantly since 1999have accepted that sales be governed by

international agreement. (htt://www.invest.gold.org).

1.3 VARIOUS AVENUES OF INVESTMENT

The nature of investment differs from individual to individual and unique to each one

because it depends on various parameters like future financial goals, the present &future

income model, capacity to bear the risk, the presents requirements and lot more. As an

investor progresses on his/her life stage and as his financial goals change, so does the

unique investor profile investment preferences among household investors have important

socio-economic implications. Such preferences influence the direction in which, and the

channels through which, household financial savings would flow. A developing economy,

like India needs a growing amount of household savings to flow to corporate enterprises.

Such flow can grow on a sustained basis if and only if there is an effective system to

ensure that the enterprises receiving the flow are sound and will make proper use of the

money provided.

What is investment? For an individual it is the exchange of money for future claim on

money or the purchase of a security of a promise to pay at a later date along with a regular

income as in the case of share, bond, debenture, etc. for the issuer it is the use of money for

the fixed capital or any other productive and unproductive activity.



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INVESTMENT OPPURTUNITIES IN BANKS

1. Fixed Deposit Accounts:-In this category are included the deposits with the bank for a

fixed period that is specified at the time of making the deposit. It is repayable on the expiry

of a specified period.

2. Savings Bank Account: - A saving Bank account is meant for the people of the lower and

the middle class who is wish to save a part of their current incomes to meet their future

needs and also intend to earn an income from their savings. The banks, therefore, impose

certain restrictions the savings bank account and also offer a reasonable rate of interest.

3. R ecurring Deposit or Cumulative Deposit Accounts: - It is the variant of the savings

bank account. It is intended to inculcate the habit of savings on a regular basis as an

inducement is offered in the form of comparatively higher rate of interest.

4. Current Account: - A current account is a running and active account that may be

operated upon any number of times.

INVESTMENT OPTIONS IN REAL ESTATE

Real Estate is basically defined as immovable property such as land and buildings. The

investment in real estate essentially depends on the risks associated with it. It can be a

business opportunity, it can generate rental income, to offset otherwise taxable income or

simply for resale.

INVESTMENT OPTIONS IN INSURENCE

Insurance provides for security and monetary benefits for the person. It provides means of

shifting the risk from the insurer. It helps the person to save money in two ways, by

investing as per the specification in the insurance plans as well as by the way of tax

savings. The regular investment in the form of periodic payments with high returns is

available in insurance. High returns in the form of periodic bounds and maturity bounds

provide with the high returns on one¶s investment in case the funds are invested in

insurance policies.

Broadly the life insurance policies are two types

a. Endowment Assurance: - The endowment assurance is one of the popular forms of

insurance. Under endowment plan the insurer offers the payments of the sum assured either



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at the end of specified period to the policy holder or if he dies before that specified period

then to his nominees. The premium is paid by the insured till the end of the term or his

death whichever is earlier.

Types of Endowment Policies

y Pure Endowment Policies

y Single or ordinary Endowment Policy

y Double Endowment Policy

y Money back Endowment Policy

b. Whole Life Policies: - A whole life policies is one that is taken to cover the entire or

whole period of life of the assured. The policy money becomes payable on the death of the

life assured to the nominee or beneficiary. As the name suggests, a whole life policy is an

insurance cover against death, irrespective of when it happens. Under his plan, the policy

holder pays regular premiums until his death, following which the money is handed over to

his family.

Types of whole life policies:-

(A) Single Premium Whole Life Policy

(B) Ordinary Whole Life Policy

(C) Limited Premium Whole life policy

INVESTMENT OPTIONS IN SMALL SAVING SCHEME

Small saving schemes are administers through post offices. These are ideal for small

investors looking for fixed return with high safety. A Number of schemes with varying tax

treatment carry a bonus too.

National Savings Certificates (NSC)

National Savings certificates (NSC) are an assured return scheme, armed with powerful tax

rebates under Section 88 of the Income tax Act, 1961. Interest is payable at 8%

compounded half-yearly for a duration of 6 years.

Investment and range of investment in NSC

NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000.

There is no prescribed upper limit on investment in NSCs.

Interest:



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Interest is payable at 8%, compound half-yearly for a duration of 6 years.

Maturity

The maturity period (duration) of a scheme is 6 years.

1. K isanVik asPatra:

K isanVikaspatra (K VP) doubles yours money in 8 years and 7 months with the

advantage of premature withdrawal. K VP is sold through all Head Post Offices and

other authorized post offices throughout India. The rate of return is 8.41 %,

compounded annually. Interest rates affect the decision to buy, hold, or sell (encash

prematurely) relating to K VP.

Investment

The minimum investment in K VP is Rs 100. Certificates are available in denominations of

Rs 100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000 AND Rs 50,000.

Maturity

The K VP has tenure of 8 years and 7 months, in which time your principal investment

doubles in value.

2. Monthly Income Scheme

The Post Office monthly scheme (MIS) provides for Monthly payment of interest income

to investors. The post office MIS gives a return of 8% plus a 10% on maturity.

Minimum Investment:

The minimum investment in a Post Office MIS is Rs 6,000 for both single and joint

accounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a

joint account.

Maturity:

The duration of the MIS is 6 years.

3. R ecurring Deposit

A Post Office recurring Deposit Account (RDA) is a kin to a recurring deposit in a bank,

where you invest a fixed amount on a regular basis. The deposit has a fixed tenure, and the

scheme is a powerful tool for regular savings.

Minimum Investment



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The minimum investment in a post office RDA is Rs 10. There is no prescribed upper limit

on your investment.

Interest

The advantage with post office deposit is that it offers a fixed rate of return at 7.5 % while

banks constantly change their deposit rates depending on their demand supply position.

Maturity

The post office RDA scheme has tenure of five years. This can be extended for a further

five years if you so desire.

INVESTMENT OPTIONS IN SECURITIES MARKET

Among all the investment options available, securities are considered the most challenging

as well as rewarding. But investment in securities requires considerable skill and expertise

and carries the risk of loss if the choice of securities is not right or they are not bought/sold

at right time.

There are large no of varieties of instruments referred to as securities in common parlance.

Different securities carry different risk±return profiles. Generally higher risks carry higher

returns. The risks are basically three asset classes based on the risk profiles. They are

equity, debt and cash. Equity is risky, debt has low risk and cash has even lower risk.

1. Equity Shares

Secondary market refers to the stock exchanges where investors can buy/sell shares that are

listed on them. Equity share have dominated India¶s stock market. As a result of significant

changes in the past, particularly computerization, online trading, dematerialization and

depository participation, investors are now dealing with a much more transparent and

efficient secondary markets. Equity shares yield returns in two ways: one dividend

declared by the companies usually at the end of the year and second is the capital gains on

the sale of equity shares. Liquidity of investment in equity shares depends upon the trading

volumes of the share.

An investor needs to be aware of the companies and their performances. Company¶s

performances should be monitored closely in order to track the investment performance.

2. Debt Instruments



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Debt instruments represent contracts where one party is the investor and other party is the

issuer. Debt instruments are a way for markets and participants to easily transfer the

ownership of debt obligations from one party to another. Debt obligation transferability

increases liquidity and gives creditors a means of trading debt obligations on the market.

Without debt instruments acting as a means to facilitate trading, debt is an obligation from

one party to another.

Maturity: Refers to the date on which the principal would be repaid.

Coupon: is the rate at which interest is calculated with reference to the face value.

3. Mutual Funds

A Mutual fund is the trust that pools the savings of a number of investors who share

common financial goals. The money thus collected is invested by the fund manager in

different types of securities depending upon the objective of the scheme. These could range

from shares to debentures to money market instruments. Most mutual funds investment

portfolios are continually adjusted under the supervision of a professional manger, who

forecasts the future he or she believes, will most closely match the fund¶s stated investment

objective.

Types of Mutual Funds

1. Open ended funds

An open-end fund is one that is available for subscription all through the year. These don¶t

have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value

(NAV) related prices.

2. Closed-ended Funds

A closed-end fund has a stipulated maturity period generally ranging from 3 to 15 years.

The fund is open for subscription only during a specified period.

Investors can invest in the scheme at the time of the public issue and thereafter they can

buy or sell the units of the scheme on the stock exchanges where they are listed. In order to

provide an exit route to the investors, some close-ended funds give an option of selling

back the units to the mutual fund through periodic repurchase at NAV prices. SEBI

regulations stipulate that at least one of the two exit routes is provided to the investor.



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1.4 GOLD AS AN INVESTMENT

For thousands of years, gold has been valued has a global currency, a commodity, an investment

and simply an object of beauty. As financial markets developed rapidly during the 1980s and

1990s, gold recorded into the background and many investors lost touch with this asset of last

resort. Recent years have seen a striking increase in investor in gold. While a sustained price

rally, underpinned by the fact that demand consistently outstrips supply, is clearly a positive in

this resurgence, there are many reasons why peoples and institutions are once again investing in

gold. Individuals have used gold as store of wealth and as insurance against the fluctuations and

depreciation of paper money and other macroeconomic and geopolitical risks. Perhaps no other

market in the world has the universal appeal of the gold market.

Successful investing is about the diversification and management risk. In layman¶s terms this

means not having all your eggs in one bucket. We know from history that markets can and do

crash and if you are not diversified your entire nest egg can wiped out. So a healthy portfolio

includes a wide range of assets including a variety of equities with exposures to different markets

sectors and regions; a variety of different countries µbonds; a diversified property portfolio ; a

cash component and a 5-15% allocation to gold ± related investments and gold bullion .the key is

to determine what amount of each asset class to have in a globalized and increasingly integrated

global economy , a portfolio should be compiled based upon current global macroeconomic

fundamentals.



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Figure 1.1: Investment pyramid

Source: www.moneyweek.com

Some exposure to gold is included in all diversified portfolios. A good rule of thumb would be

minimum allocation of around 10% to gold and related gold ± investment. Demand for gold for

the purpose of investment has outpaced the demand for the purpose of investment has outpaced

74.0 tonnes of gold for investment from January to September 2004, while it was 67.8 tonnes

during the same period in 2003.

While the advantage of having gold in an investorµs portfolio have been talked about time and

again

µWhat should be the amount of investment µis always a question asked by the investor¶s. Thereare two schools of thoughts on this subject .the recommendations are in the range of a 15% to

20% allocation of the total portfolio.

y 15 % of the investment portfolio ± European central bank decision at the time

establishment in 1999 based on internal studies.



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y 20% of the investment portfolio ± based on a model done by germ mill & Hillman on 20

years data.

Ideally however, allocation to gold from an investment perspective should be based on

comprehensive financial planning. it should always be remembered that investment in physical

gold must always be in the form of coins/bars and should be in addition to the jewelry held by

the household . Advantages of gold in a portfolio can be explained through the following points:

y Gold has low negative correlation with most other asset classes

y An investment portfolio with an allocation to gold improves the consistency of portfolio

performance during both stable and unstable periods.

y The price of gold is not linked to the performance of economy .industry or companies

y Gold offers the benefits of diversifying portfolio risks.

1.5 GOLD EXCHANGE TRADED FUNDS

Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and

most of them seek to mirror the return of an index, a commodity or a basket of assets. ETFs are

listed and traded on stock exchanges like stocks. They enable investors to gain broad exposure toindices or defined underlying asset (commodity) with relative case, on a real-time basis, and at a

lower cost than many other forms of investing.

Gold ETFs provided investors a means of participating in the gold bullion market without the

necessity of taking physical delivery of gold, and to buy and sell that participation through the

trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold

prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.

Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before

expenses, closely correspond to the returns provided by physical Gold. Each

unit is approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also

provide a unit which is approximately equal to the price of ½ gram of Gold.

Why should an investor invest in Gold ETF



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No worry on adulteration

Gold provides diversification to the portfolio

Gold is considered as a Global Asset Class

Gold is used as a Hedge against Inflation

Gold is considered to be less volatile compared to equities

Held in Electronic Form

Store of value

Extremely Liquid

Advantages of Investing in Gold ETFs:

Potentially cheaper to have price exposure to gold price as compared to other available

Avenues.

Quick and convenient dealing through demat account.

No storage and security issue for investors.

Transparent pricing.

Taxation of Mutual Fund.

Can be traded on stock exchange like buying / selling a stock.

Ideal for retail investor as minimum lot size to trade is one unit on secondary market.

NAV of a unit will track price of approximately ½ or 1 gram of gold.

Gold ETFs available in India

Benchmark Mutual Fund - Gold Benchmark Exchange Traded Scheme (NSE Symbol:

GOLDBEES).

K otak Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: K OTAK GOLD).

UTI Mutual Fund - UTI Gold Exchange Traded Fund (NSE Symbol: GOLDSHARE).

Reliance Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: RELGOLD).

Quantum Gold Fund - Exchange Traded Fund (ETF) (NSE Symbol: QGOLDHALF.



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1.6 HOW TO INVEST IN GOLD

There is an increasingly wide range of methods available to investors wanting to buy gold, or

gain exposure to gold price movements. From gold coin to complex structured financial

products, the most appropriate way will depend on the requirements and outlook of the

individual investor.

y Coins and small bars.

y Exchange-traded gold.

y Gold accounts.

y Gold certificates.

y Gold orientated funds.

y Structured products.

The distinction between the purchase of physical gold and gaining an exposure to movements in

the gold price is not always clear, especially since it has always been possible to invest in bullion

without actually taking physical delivery.

COINS AND SMALL BARS

The first gold coins were struck by K ing Croesus, ruler of Lydia in western Asia Minor from 560

to 546 BC, whose wealth came from the gold from the mines and sands of the River Pactolus.

Gold coins have been legal tender ever since. Bullion coins and small bars offer private investors

an attractive way of investing in relatively small amounts of gold. In many countries - including

the whole of the European Union - gold purchased for investment purposes is exempt from

Value Added Tax.

BULLION COINS

Investors can choose from a wide range of gold bullion coins issued by governments across the

world (see panel, below right). These coins are legal tender in their country of issue for their face

value, rather than for their gold content. For investment purposes, the market value of bullion

coins is determined by the value of their fine gold content, plus a premium or mark-up that varies

between coins and dealers. The premium tends to be higher for smaller denominations. Bullion

coins range in size from 1/20 ounce to 1000 grams, although the most common weights (in troy



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ounces of fine gold content) are 1/20, 1/10, 1/4, 1/2 and 1 ounce. It is important not to confuse

Bullion coins with commemorative or numismatic coins, whose value depends on their rarity,

Design and finish rather than on their fine gold content. Many dealers sell both.

SMALL GOLD BARS

Gold bars can be bought in a variety of weights and sizes, ranging from as little as one gram to

400 troy ounces (the size of the internationally traded London Good Delivery bar). Small bars

are defined as those weighing 1000g or less. According to industry specialists Gold Bars

Worldwide, there are 94 accredited bar manufacturers and brands in 26 countries, producing a

total of more than 400 types of standard gold bars between them. They normally contain a

minimum of 99.5% fine gold.

EXCHANGE TRADED GOLD

Gold is traded in the form of securities on stock exchanges in Australia, France, Hong K ong,

Japan, Mexico, Singapore, South Africa, Switzerland, Turkey, the United K ingdom and the

United States. By design, these forms of securitized gold investment, all regulated financial

products, are generally referred to as Exchange Traded Commodities or Exchange Traded Funds

(ETFs), and are expected to track the gold price almost perfectly. Unlike derivative products, the

securities are 100% backed by physical gold held mainly in allocated form. These securities have

had a major impact on the gold market, representing an annual average of 32% of identifiable

investment and 6.5% of total physical demand over the 5 years to 2008. Financial advisors and

other investment professionals can provide further details about these products.

GOLD FUTURE

Gold futures contracts are firm commitments to make or take delivery of a specified quantity and

purity of gold on a prescribed date at an agreed price. The initial margin or cash deposit paid to

the broker is only a fraction of the price of the gold underlying the contract. That means investors

can achieve notional ownership of a value of gold considerably greater than their initial cash

outlay. While this leverage can be the key to significant trading profits, it can also give rise to

equally significant losses in the event of an adverse movement in the gold price. Futures prices

are determined by the market's perception of what the carrying costs - including the interest cost



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of borrowing gold plus insurance and storage charges - ought to be at any one time. The futures

price is usually higher than the spot price for gold. Futures contracts are traded on regulated

commodity exchanges.

GOLD OPTIONS

These give the holder the right, but not the obligation, to buy ('call' option) or sell ('put' option) a

specified quantity of gold at a predetermined price by an agreed date. The cost of such an option

depends on the current spot price of gold, the level of the pre-agreed price (the 'strike price'),

interest rates, the anticipated volatility of the gold price and the period remaining until the agreed

date. The higher the strike price, the less expensive a call option and the more expensive a put

option. Like futures contracts, buying gold options can give the holder substantial leverage.

Where the strike price is not achieved, there is no point in exercising the option and the holder's

loss is limited to the premium initially paid for the option. Like shares, both futures and options

can be traded through brokers.

GOLD ACCOUNTS

Gold bullion banks offer two types of gold accounts - allocated and unallocated:

Allocated Accounts

Effectively like keeping gold in a safety deposit box, this is the most secure form of investment

in physical gold. The gold is stored in a vault owned and managed by a recognized bullion dealer

or depository. Specific bars (or coins, where appropriate), which are numbered and identified by

hallmark, weight and fineness, are allocated to each particular investor, who pays the custodian

for storage and insurance. The holder of gold in an allocated account has full ownership of the

gold in the account, and the bullion dealer or depository that owns the vault where the gold is

stored may not trade, lease or lend the bars except on the specific instructions of the account

holder.

Unallocated Account

Investors do not have specific bars allotted to them (unless they take delivery of their gold,

which they can usually do within two working days). Traditionally, one advantage of unallocated



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accounts has been the lack of any storage and insurance charges, because the bank reserves the

right to lease the gold out. Now that the gold lease rate is negative in real terms, some banks

have begun to introduce charges even on unallocated accounts. Investors are exposed to the

creditworthiness of the bank or dealer providing the service in the same way as they would be

with any other kind of account. As a general rule, bullion banks do not deal in quantities under

1000 ounces - their customers are institutional investors, private banks acting on behalf of their

clients, central banks and gold market participants wishing to buy or borrow large quantities of

gold.

Other opportunities for smaller investors include:

GOLD POOL ACCOUNTS

There are alternatives for investors wishing to open gold accounts holding less than 1000 ounces.

For instance, in Gold Pool Accounts - where you have a defined, unsegmented interest in a gold

accounts pool of gold - you can invest as little as one ounce.

ELECTRONIC CURRENCIES

There are also electronic 'currencies' available - linked to gold bullion in allocated storage which

offer a simple and cost-effective way of buying and selling gold, and using it as money. Any

amount of gold can be purchased, and these currencies allow gold to be used to send online

payments worldwide.

GOLD ACCUMULATION PLAN

Gold Accumulation Plans (GAPs) are similar to conventional savings plans in that they are based

on the principle of putting aside a fixed sum of money every month. What makes GAPs different

from ordinary savings plans is that the fixed sum is invested in gold. A fixed sum of money is

withdrawn automatically from an investor's bank account every month and is used to buy gold

every trading day in that month. The fixed monthly sums can be small, and purchases are not

subject to the premium normally charged on small bars or coins. Because small amounts of gold

are bought over a long period of time, there is less risk of investing a large sum of money at the

wrong time. At any time during the contract term (usually a minimum of a year), or when the



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account is closed, investors can get their gold in the form of bullion bars or coins, and sometimes

even in the form of jewelry.

GOLD CERTIFICATES

Historically, gold certificates were issued by the U.S. Treasury from the civil war until 1933.

Denominated in dollars, these certificates were used as part of the gold standard and could be

exchanged for an equal value of gold. These U.S. Treasury gold certificates have been out of

circulation for many years, and they have become collectibles. They were initially replaced by

silver certificates, and later by Federal Reserve notes. Nowadays, gold certificates offer investors

a method of holding gold without taking physical delivery. Issued by individual banks,

particularly in countries like Germany and Switzerland, they confirm an individual's ownership

while the bank holds the metal on the client's behalf. The client thus saves on storage and

personal security issues, and gains liquidity in terms of being able to sell portions of the holdings

(if need be) by simply telephoning the custodian.

The Perth Mint also runs a certificate programmer that is guaranteed by the government of

Western Australia and is distributed in a number of countries.The Perth Mint Certificate Program

(PMCP) enables you to invest precious metal without the inconvenience and risk of personal

storage. The PerthM

int issues a Certificate to you confirming your purchase, which is stored atthe Mint on your behalf.

GOLD ORIENTED FUNDS

A number of collective investment vehicles specialize in investing in the shares of gold mining

companies. The term "collective investment vehicles" as used here should be taken to include

mutual funds, open-ended investment companies (OEICs), closed-end funds, unit trusts, and any

similar structures. A wide range of such funds exists and they are domiciled in a number of

different countries. These funds are regulated financial products and as such it is not possible

here to provide details on any specific funds.

Funds are likely to differ in their structure - some may invest simply in the shares of gold mining

companies, some may invest in companies that mine minerals other than gold, some may invest

in futures as well as mining equities and some may invest partly in mining equities and partly in



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the underlying metal. It would be misleading to equate investment in a gold mining equity with

direct investment in gold bullion as there are some significant differences. The appreciation

potential of a gold mining company share depends on market expectations of the future price of

gold, the costs of mining it, the likelihood of additional gold discoveries and several other

factors. To a degree, therefore, the success of the investment depends on the future earnings and

growth potential of the company. Most gold mining equities tend to be more volatile than the

gold price. While they are subject to the same risk factors that influence the prices of most other

equities there are additional risks linked to the mining industry in general and to individual

mining companies specifically.

STRUCTURED PRODUCTS

The market for structured products is dominated by institutional investors - or, in the case

of forwards, by gold market professionals - because the minimum investment can be

high. The following is a general overview of what these products are like and how they

work.

GOLD LINKED BONDS AND STRUCTURED NOTES

Gold-linked bonds are available from the world's largest bullion dealers and investment banks.

Their products provide investors with some combination of:

y Exposure to gold price fluctuations

y A yield

y Principal protection.

Structured notes tend to allocate part of the sum invested to purchasing put/call options

(depending on whether the product is designed for gold bulls or bears). The balance is invested

in traditional fixed income products, such as the money market, to generate a yield. They can be

structured to provide capital protection and a varying degree of participation in any price

appreciations depending on market conditions and investor preferences.



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1.7 HIKING IN GOLD PRICES

The gold price continues to be in the news a lot due to the steady rise of the value of gold as

measured against the dollar. But what does the gold price mean? The value of gold actually does

not change much. What does change is the amount of paper or electronic money needed to

purchase an amount of gold, most universally measured as US Dollars (USD) per Ounce.

The gold price is also measured in 'price per kilogram' and 'price per gram'. For example the

jewelry industry usually is concerned with the price of gold in grams whereas investors usually

watch the price per ounce. For over one hundred years from 1800 through to 1970, the cost of

gold remained fairly stable with a very gradual rise from 19 US dollars an ounce to 38 US dollars

an ounce. Then in 1975 there is recorded a jump to 175 US dollars per ounce! This is a massive

jump in just a few years. Not only was that but in 1980 there an even more massive jump to 641US dollars an ounce. In 1985, however, it plummeted by almost half and was steady in the 270 to

425 range until recently when it started its march upward again. However, whereas in the 1980s

there was a dramatic rise, this time, so far, it appears steadier. What does the rise in the gold

price mean? Does this mean that there is less faith in the US dollar? Or is it just that people

prefer to own something more solid than paper currency It was pointed out recently that if the

US reverted back to a gold backed currency then, with the vast quantity of paper money (dollars)

currently printed and in circulation, then it would take $52,000 USD to purchase one ounce of

gold. That gives new meaning to the word inflation! It seems evident that the gold price

demonstrates people's confidence in gold much more than in the dollar and, for gold owners, that

can only be a good thing. It is likely that in these economic and troubling times people will seek

something that remains stable. And gold has a tradition of being stable come what may and,

whatever the gold price, people will certainly be willing to pay it.

(http://www.goldprice.org/buying-gold/2006/04/gold-price.html).

FACTORS AFFECTING GOLD PRICE

Thought to be one of the first known metals, gold has been coveted throughout history for its

beauty, scarcity, malleability, and uncanny resistance to rust and corrosion. Centuries ago, gold¶s

unique combination of properties ± its sun-like color, its soft hardness, and, especially, its

imperviousness to decay and corruption ± imbued it with magical associations in the eyes of



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many. Because of these unique properties, gold has traditionally been the currency of choice for

much of the world¶s population. The value of gold has transcended all national, political, and

cultural borders, making it the ideal currency.

Historically gold prices were determined by a combination of political and economic factors, till

a universally acceptable concept of London and American gold price was institutionalized. An

outcome of such initiatives was the Washington Agreement. However, in the past few years, the

major factors impacting the gold price can be summarized as under:

Weak US Dollar

Growth in Demand for Jewelry

Increase in demand for exchange-traded paper backed products

WEEK US DOLLER

Projections about a declining dollar due to an ever-increasing twin deficit supported by many

investment veterans are met by much denial from politicians as well as from investors. As long

as foreigners are willing to pour in the amount of $2 billion dollars every working day, the dollar

won't crash. But if foreign confidence were to wane, the US dollar will be heading south. No

matter how you look at the US twin deficits and America's future fiscal liabilities, this problem is

huge and some painful adjustments not only seem to be necessary but unavoidable as well. It

should be obvious that one of these major painful adjustments will be a massive devaluation of

the US dollar. It seems that the idea of a dollar devaluation is gaining support from the Fed when

the President of the Dallas Fed, Robert McTeer recently said: "over time, there is only one

direction for the dollar to go - lower." Former ECB president Wim Duisenberg, quoted by

Spanish Newspaper El Pais, recently said: "A dollar devaluation seems inevitable due to the

tremendous US Current Account deficit." Furthermore he recently said on Dutch television that

we can only hope and pray for a smooth economic transition in the US. Why is this so

important? Simple, the US dollar is the key driver for Gold; as the dollar goes, so will gold; but

in the opposite direction. Gold is the anti-dollar with a high inverse correlation to the dollar! In

the end, gold is still a monetary asset and trades like a currency.



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GROWTH IN DEMAND FOR JEWELRY

Inspire of the convergence of Diamond and Palladium, the demand for gold jewelry has seen a

regular growth year on year. Countries which are primarily responsible for this growth are India,

China, Italy, Turkey and the USA. The demand for consumption of gold in jewelry was 6%

higher at 735 tonnes and also comprised a new first-quarter record. The US, which accounts for

10 % of world gold demand, is also one of the markets where public taste in gold jewelry is

enjoying a renaissance. The renewed interest in gold also extends to Japan, a market which

showed a 19% increase in demand. The Indian market ± the world¶s largest for gold demand ±

was 23 % higher following the marriage and festival period which, in turn, has led to restocking

by retailers. The earthquake in India, however, is unlikely to hit demand significantly as it

occurred in an area which comprises only 5% of the total Indian consumption. There were sharpfalls in demand in Turkey and Taiwan - down 38% and 31% respectively. This was due to

economic difficulties and continued weakness in investment demand.

INCREASE IN DEMANDS FOR EXCHANGE TRADED PAPER BACKED PRODUCTS

For the first time in history, gold can be purchased like any listed stock at select stock exchanges

of the world like London Stock Exchange, Australian Stock Exchange (Gold Bullion Securities)

and New York Stock Exchange (Street Tracks Gold). The World Gold Council initiatedElectronic Traded Funds have displayed very good performance and growth in volumes since

launch.

FACTORS AFFECTING GOLD PRICE IN LAST 3 YEARS

If we analyses the track record of gold in the past three years, we can conclude that gold prices

have seen a steady and impressive northward growth. In January 2002, gold prices per 10 gm.

stood at Rs 5,453. By November 2004, the price had gone up to Rs 7,005. The year 2004 has

indeed been a great year for gold. There has been a substantial increase in gold prices, but this

has not dampened consumers¶ inclination towards investments in gold. In fact, investors have

begun to recognize the effectiveness of gold as an efficient savings vehicle and an alternate asset

class.



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The graph below is indicative of the quarterly price of gold in Indian rupees per 10 grams from

November 2002 to November 2004 showing the upward movement.

Figure 1.2: Graph indicating quarterly price of gold

Note: Figures on the Y-axis indicate currency in INR

The following table gives us the all-time high gold prices touched in the period, Jan 2000 to Nov

2004.

Table 1.1: All time high gold prices

All time high

Year Amount (Month of all time high)

2000 4,629 (February)

2001 4,812 (October)

2002 5,669 (December)

2003 6,576 (December)

2004 7,005 (November)

In 2004, gold prices saw a slight dip in April 2004, only to pick up again in July 2004.

Globally, the price of gold has historically been impacted primarily by the US dollar. However in

the past few years, oil prices, the US dollar and the demand-supply equation for gold have

become equally significant contributors to the price of gold.



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This article, written by Mr. Navin K umar (March 10, 2005)

gold as investment avneue

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