Why invest in Gold

Gold is a foundation asset within any long term savings or investment portfolio. For centuries, particularly during times of financial stress and the resulting 'flight to quality', investors have sought to protect their capital in assets that offer safer stores of value. A potent wealth preserver, golds stability remains as compelling as ever for todays investor. As one of the few financial assets that do not rely on an issuer's promise to pay, gold offers refuge from widespread default risk. It offers investors insurance against extreme movements in the value of other asset classes. A number of compelling reasons underpin the widespread renewal of interest in gold as an asset class: Portfolio diversification Most investment portfolios primarily hold traditional financial assets such as stocks and bonds. Diversifying your portfolio can offer added protection against fluctuations in the value of any single asset or group of assets. Risk factors that may affect the gold price are quite different in nature from those that affect other assets. Statistically, portfolios containing gold are generally more robust and less volatile than those that do not. Inflation hedge Market cycles come and go, but over the long term, gold retains its purchasing power. Golds value, in terms of the real goods and services that it can buy, has remained remarkably stable for centuries. In contrast, the purchasing power of many currencies has generally declined, due for the most part to the rising price of goods and services. Hence investors often rely on gold to counter the effects of inflation and currency fluctuations. Currency hedge Gold is employed as a hedge against fluctuations in currencies, particularly the US dollar. If the worlds main trading currency appreciates, the dollar gold price generally falls. On the other hand, a fall in the dollar relative to the other main currencies produces a rise in the gold price. For this reason, gold has consistently proved to be one of the most effective assets in protecting against dollar weakness. Risk management Gold is significantly less volatile than most commodities and many equity indices. It tends to behave more like a currency. Assets with low volatility will help to reduce overall risk in your

portfolio, adding a beneficial effect on expected returns. Gold also helps to manage risk more effectively by protecting against infrequent or unlikely but consequential negative events, often referred to as tail risks. Demand and supply The price of gold tracks the shifting balance of supply and demand. Long lead times in gold mining mean production of gold is relatively inelastic, regardless of increases in demand. Thats why the rally in the gold price since 2001 has not engendered a meaningful increase in gold production levels. Demand for gold has shown sustained growth recently, due at least in part to rising income levels in key markets. These supply and demand factors have laid foundations for golds most positive outlook in over a quarter of a century.

Treasury Bills What they Are Treasury bills (T-bills) are very safe short-term investments issued by the federal government and some provinces. How they Work Governments issue T-bills in very large denominations of $1 million or so. Banks and investment dealers break these up and sell them to investors. You always buy a T-bill at a discount to its face value. That means you pay less than what you'll get back when the government cashes it for you. T-bills are mostly offered in terms of one month to just under one year. You might pay $975 for a T-bill and get back $1,000 when it matures one year later. Your profit is stated as a percentage of your investment, in this case it would be about 2.56% ($25 on $975). Even though your return on T-bills is a capital gain, the government treats the return as interest income, which is taxed at a higher rate. The Risks Treasury bills are considered among the safest investments, especially when they have three months or less to maturity. Should you need your money before the T-bills mature, you can always sell them on the open market through an investment dealer. The Rewards The returns on T-bills are generally lower than for longer term investments. However, they are ideal investments when you can't afford to risk your money. If you believe the stock market or bond market is going to slump, T-bills can be a good place to park your money for a short while. Big investors with lots of cash on hand might prefer to invest in T-bills rather than put the money in the bank. This is because bank account deposits are insured to a maximum of $100,000.
Short-term bond investments can supplement your investment portfolio.

U.S. treasury bills are basically just government bonds but with a different name. While these bills are usually referred to as short-term bonds in lay terms, the phrase "treasury bill" actually has a very specific meaning. Bills usually only have fixed terms that are less than a year. In most cases, these bills will mature after six months, but in some cases they can be as short as less than a week. Essentially, these bills are for a fixed amount of money, but you purchase them for less than face value. The bill is not worth the price you paid for it until after it matures. These bills are good if you're looking for a short term investment for your money, and they can be used to diversify your portfolio. However, they are also a type of investment that will require a lot of work and attention on your part. After all, you will have to find another investment opportunity for the money relatively quickly after your treasury bills mature. However, if you're looking for a safe type of investment, then you can either purchase treasury bills, notes or bonds. These are all safe investments from the federal government, although the amount of time before maturity will vary. Treasury bills are sold by the federal government in order to get extra money to pay for government projects and programs. Since long-term bonds are going to give the government money for a longer period of time, you are more likely to get a much higher yield for bonds instead of bills. While it makes the most sense to wait until maturity - especially since treasury bills mature after a matter of weeks in most cases, you do not have to. In many cases, you will be allowed to sell the treasury bill early. You will not be able to sell the bill for the maturity face value, but you should be able to sell for more than you paid for the bill. If you want to sell your treasury bills early, you should make sure that you find the best market. You should also make sure that you sell the bills for enough money to at least get your initial investment back after broker fees.

During these tumultuous times for the markets, the only reprieve that investors see is in the yellow precious metal. More and more people have been buying gold exchange traded funds (ETFs), and the segment has seen a volume growth of almost 25% in the past three months, says Sanjiv Shah, CoCEO of Goldman Sachs. In an interview with CNBC-TV18, he says that ETFs in India give an edge to the customer in the sense that it gives them an opportunity to buy gold at international prices with no additional or hidden cost. "Having gold as part of asset allocation is imperative for diversification of portfolio. Gold can be held in many forms, but gold ETFs are the best," he says. Below is the edited transcript. Also watch the accompanying video

Q: A word on whether this entire run on gold has caused more redemption pressure or fresh inflows? How are people choosing to approach the kind of rally we have seen in gold so far with specific reference to ETF product? A: Fresh inflows, the normal thought would be that given the run up in gold prices, most people would actually start booking profits. However, what we have seen over the last year and more is that people have been buying gold. If you look at the whole ETF space in India, the size has been growing from strength to strength. Everyday we see more and more people buying gold ETFs. Maybe, its a factor of what is happening around the world, but the fact remains that more and more people are actually buying gold ETFs. Q: Could you quantify though in terms of what the increase has been in the gold ETF product in specific over the last three months in terms of data? A: In terms of data, if you look at it the ETF space, the volume growth has been close to about 2025%. Also read: Gold prices to repeat 1980 climb: Analyst Q: What is the beat ratio with gold prices? Is it exactly in tandem or are you seeing any variation in terms of what the ETFs churn out? A: Exactly the same; the thing about ETFs in India is that basically, investors get a chance to buy in international prices, obviously converted into rupee. But the biggest advantage they have is they literally buy gold at international prices, which is not the case before the ETFs came into the Indian market. There are no extra expenses which typically anybody pays. So when an investor comes into ETF in India, he is paying international prices and without any variation at all. Q: The criticism at this point about gold is that its a rally thats gone too far, its topping out. How would you defend investing in gold ETF right now? A: Whatever the price is, we dont know whether its going to go up or down. We always keep telling our investors, the best way to look at it is, you look at your asset allocation ratio. If you have invested in gold and its become 30-40% of your portfolio, sure it makes sense to sell. But you are not invested in gold at all, 10-15% of your portfolio should have gold. This is very critical for diversification. Obviously, gold could be many forms, but we think ETF is the best way to invest in. So, whatever the price, look at your asset allocation ratio. Not invested in gold, please go and invest. Thats how we look at it. Q: What would you recommend now from the equity-based ETF products? A: If you observe the Nifty ETF, everyday you see huge volumes happening on the stock exchanges. What we have seen is people coming and buying ETFs on the stock exchange whenever the market falls. Thats a very heartening sign. We believe people are using Systematic Investment Plans (SIPs), if you want to call them. People are getting into the market, especially since the fall in the market, quite aggressively to buy it; we have seen more and more inflows happening in our ETFs and thats a good sign. Q: Any data to support that, I am just trying to understand how much interest has gone into a product like this versus a commodity? A: Equity product can nearly bring about 15-20% growth. I am talking about unit size in our ETF.

Gold and silver prices climbed for a second day. A survey shows that central banks turned net buyers of gold in 2010 and cut exposure to debts issued by Greece, Ireland and Portugal. It's also unveiled that reserve managers found gold, investment-grade corporate bonds and AAA-rated bonds as more attractive than the year before. We believe the trend will continue as concerns over fiscal stabilities and inflation will trigger central bank purchases of the metal. US President Barack Obama's budget plan to reduce the country's deficits by $4 trillion in 12 years is expected to generate criticism from Republicans regarding tax hikes. The market generally thinks the proposal is not aggressive enough. Indeed, Obama's deficit cut is lower than what were proposed by Paul Ryan, House Budget Committee Chairman, earlier this month and by Erskine Bowles and Alan Simpson, co-chairmen of Obama's fiscal commission, late last year. Ryan suggested cutting the deficit through spending cuts by $6 trillion over 10 years while the Bowles-Simpson commission proposed to trim deficits by $3.8 trillion over a decade. A report by Benn Steil and Paul Swartz published in the website of the Council of Foreign Relations on Monday suggests the Obama administration's deficit consolidation plan is based on growth assumptions, instead of actual cuts in spending. The Office of Management and Budget projects the US economy will grow +4.4% in 2013 and +4.3% in 2014, compared with consensus market forecasts of +3.0% in 2013 and +2.8% in 2014 during the period. If consensus forecasts are used in budget calculations, the government will have to cut $1.75 trillion more to achieve the same result it desires. If the budget plan fails to alleviate deficit problem, the status of USD as a major reserve currency will once again be threatened. The IMF urges the US to derive a 'credible strategy' to stabilize its public debt as the country is the only large advanced economy where 'the cyclically adjusted fiscal deficit is expected to increase in 2011 compared with 2010 despite the ongoing economic recovery'. Deteriorating fiscal conditions in the US benefits gold as investors lose confidence in fiat currencies and prefer owning hard assets as a store of value. A survey done by Central Banking Publications indicates that reserve managers no longer view that sovereign debts are risk-free. More than 80% of respondents said sovereign risk fears had impacted their strategy. Another issue affecting investment strategies was Fed's expansion of QE2 in November last year. These 2 factors are probably the major reasons transforming central banks to net gold buyers, after being net sellers for 20 years. We expect if the US government fails to pass a feasible budget plan, gold may rise further as investors seek to diversify away from USD.

Larry D. Spears writes: Gold prices have had a phenomenal run over the past year, but the distinguishing feature of the market in recent weeks has been extreme volatility - volatility that has many investors nervous about protecting the big profits they've rolled up and looking for ways to hedge gold.

Now, we don't advise jumping off the gold bull's back just yet - especially since Money Morning's leading gurus see a gold price climb to $5,000 possible over the long haul. But you may want to consider taking out a little short-term "insurance" on your precious metals profits. In fact, we suggested readers do just that in the Aug. 22 issue of Money Morning Private Briefing. We even went a step further and issued step-by-step instructions for a gold-hedging strategy. Just two days later, on Aug. 24, gold suffered its third-worst down day in history, plunging 5.6%. Readers who took our advice reaped windfall profits as a result. And now we're giving you the same opportunity. We're back today with another strategy to help "insure" your gold profits. The Secret Way to Hedge Gold The only thing you need to do to hedge gold is follow this simple options strategy. As with most option strategies designed to lock in existing profits, this one begins with the purchase of an atthe-money CME gold put option - one for each gold futures contract you own (or one for each 100 ounces of gold you hold in other forms). [Editor's Note: For those unfamiliar with options, a put option gives its owner the right to sell a specific underlying asset at a designated price for a limited period of time. For example, an October FreeportMcMoRan Copper & Gold Inc. (NYSE: FCX) put option with a strike price of 42 would give its holder the right to sell100 shares of FCX common stock at a price of $42 a share at any time between the date of purchase and the option's stated expiration date, in this case, Oct. 21, 2011. A call option, the other basic type of option, would give its holder the right to buy a given asset at a specified price for a limited period of time.] Normally, that would be sufficient to protect your gains, but this time there's a catch. The huge jump in volatility - i.e., the Chicago Board Option Exchange's (CBOE) Gold Volatility Index is trading near its all-time high - has resulted in sharply higher option premiums. The price of an at-the-money gold put has nearly doubled over the past month - from roughly $56 an ounce ($5,600 for a full 100-ounce contract) to more than $100 an ounce. That means that, near the close on Monday, with December gold at $1,813.30, it would have cost you $10,190 to buy the at-the-money December $1,810 put option as insurance. That's just too expensive, since it means the gold price would have to fall below $1,711.40 an ounce before your insurance would even kick in, costing you more than $10,000 in current profits. Fortunately, the increased volatility has also driven up the prices of gold call options - and that means you can use one of them to offset much of the put's higher price. In a nutshell, here's how the modified two-pronged "insurance policy" would be established, using the actual prices available near the close on Monday, with the December gold future at $1,813.30: You buy an at-the-money December $1,810 gold put at a premium of $101.90, or $10,190 for the full 100ounce option contract. You simultaneously sell a deep out-of-the-money December $2,000 gold call at a premium of $43.40, or $4,340 for the full contract.

The net cost of the insurance policy thus becomesjust $58.50, or $5,850 for the combination (the $101.90 cost of the put you bought minus the $4,340 premium you received for selling the call). With this option combination in place, the most you can lose is $6,150, regardless of how far the price of your gold holdings might fall between now and the options' expiration date - Nov. 22, 2011. Even if gold plunged all the way back to $1,483.70, where it stood on July 1 of this year, you'd give back just $6,150 of your profits - which could be as much as $32,960 assuming you bought at the low (and much more if you bought a year ago). Even better, if gold reverses again and moves higher, you continue to profit with this two-pronged hedge gaining dollar for dollar with the gold future until the price goes above the $2,000 strike price of the call option you sold (reduced, of course, by the $5,850 premium you paid for your insurance). The accompanying table shows the possible outcomes for this option hedge position at every gold price from $1,400 to $2,500, assuming it was initiated near Monday's close. You'll have to adjust the option strike prices used in the strategy based on gold's price when you make your move, but the numbers should be similar at almost any level. Be aware, as well, that you can adjust the risk/reward characteristics of the hedge by choosing puts and calls with different strike prices. For example, if you feel Monday's close was the bottom of the current pullback, you could buy an out-of-themoney put rather than the at-the-money put - say the December $1,790 rather than the December $1,810. The "insurance" provided by that put wouldn't kick in quite as soon, but it would be more than $1,000 cheaper up front.