Views on Gold as Investment:-

Contradicting views on gold have claimed reams of newsprint over the past many months. Some experts believe that the dream run in gold is over and prices have peaked. Other contest that gold has hardly lost its safe haven lustre. Particularly since there is no end in sight to money printing in the Western economies. Also with currencies devaluing like never before the chances that only gold will be able to stave off inflation is a real possibility. But those hoping to become rich over night by investing in tons of gold have surely been disappointed off late.

The India government has its own pessimistic and myopic views on gold. It believes that the yellow metal is the key culprit for India's current account deficit problem. It also imposed additional taxes to act as a deterrent to buying gold. But at the same time showed no inclination in making other investment avenues more palatable. The meek attempt at hedging inflation with inflation indexed bonds also does not seem to be a winner. Hence the verdict is that Indians will continue to park their surpluses in gold.

What is however encouraging is that the Reserve Bank of India (RBI) has changed its views on gold. It does recognize the problem caused by excessive gold imports. However, the central bank has concluded that gold is the best possible liquid investment at the current juncture. Moreover, it believes that gold could be the key to resolving the bottlenecks in financial inclusion. Earlier RBI had cited the need to have a lower loan to value ratio (LTV) on lending against gold as compared to home loans. Banks were allowed to lend only up to Rs 60 for every Rs 100 worth of gold mortgaged with it. As against up to 85% of the value of your property by way of home loan. But that may no longer be the case. As per the recommendation of a Working Group commissioned by the RBI eve n gold may fetch up to 75% LTV going forward. RBI's confidence in the 'banking potential' of the yellow metal is not without statistical backing. For bank loans against gold have multiplied 4 times in the last 4 years. And customers even in semi urban and rural areas find gold as the easiest collateral to offer for bank loans.

Thus while many of its counterparts in emerging markets are buying more gold as reserves, the RBI is doing its bit by encouraging gold as a financial asset. We believe that the fundamentals of global money supply do show a strong possibility of gold being one of the most lucrative asset classes in the long term. If India can use this opportunity to make the economy financially inclusive it will be a cherry on the cake. Having said that, as with stocks, investment in gold too can reap results only over the long term, that too with correct asset allocation. 

                                                                                                                Courtesy:- Equity Master