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Creating investment portfolio for buying gold

It is customary among Indian households for parents to gift gold to their daughters during their wedding. The demand for gold increased significantly in 2010, despite the sharp increase in price levels. This captures the relevance of gold in Indian society.

For those investing in gold with a time horizon of 5 years or more, buying gold jewellery at present for future consumption may not be ideal, as fashion and preferences change with time. The question is: Can an investment portfolio help such individuals better manage their goal of gifting gold?

This article shows why an investment portfolio can fulfill this goal better. It then discusses why such a portfolio should hold some other assets, besides physical gold and gold ETFs.

Investment Factors

Individuals typically invest in physical gold – either in its pure form or in the form of ornaments. Physical gold does not, however, satisfy two important attributes that an investment asset should possess.

One, the yellow metal does not generate income returns. Now, investment assets typically have two sources of return – income return and capital appreciation.

Depending on a single source exposes the investor to high risk. Of course, it can be argued that equity investment today is primarily dependent on capital appreciation, as dividend yields are negligible.

True, but an investor still has the choice of buying high dividend-yield stocks; that choice isn`t available with physical gold investments. And two, gold is not a liquid asset. By liquid, we mean investors cannot sell gold with the ease and convenience with which they can sell stocks.

Besides these issues, there is another practical problem. Storing gold is costly, compared with that of financial assets. All these ought to deter individuals from buying the yellow metal.

Yet, individuals buy gold because of a behavioral bias that refers to the good feeling that an individual experiences from buying gold. And this feeling moderates the risk associated with such investments.

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Posted by on Nov 22 2011. Filed under Gold stocks. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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