INVESTING IN GOLD

For thousands of years, gold has been valued as a global currency, a commodity, an
investment and simply an object of beauty. As financial markets developed rapidly during
the 1980s and 1990s, gold receded into the background and many investors lost touch with
this asset of last resort. Recent years have seen a striking increase in investor interest in
gold. While a sustained price rally, underpinned by the fact that demand consistently
outstrips supply, is clearly a positive factor in this resurgence, there are many reasons why
people and institutions around the world are once again investing in gold. This website
provides you with the background to these reasons and describes the defining

characteristics of the gold market from an investor's point of view. Why gold?

Gold has attracted investors throughout the centuries, protecting their

wealth and providing a 'safe haven' in troubled or uncertain times. This appeal remains
compelling for modern investors, although there are also a number of other reasons that underpin
the widespread renewal of investor interest in gold.
Safe haven
In volatile and uncertain times, there is typically a 'flight to quality' as investors seek to protect
their capital by moving it into assets considered to be safer stores of value. Gold is among a
handful of financial assets that do not rely on an issuer's promise to pay, offering refuge from
default risk. It provides insurance against extreme movements that often occur in the value of
traditional asset classes in unsettled times.
Portfolio diversification
Most investment portfolios are invested primarily in traditional financial assets such as stocks
and bonds. The reason for holding diverse investments is to protect the portfolio against
fluctuations in the value of any single asset or group of assets that react in a common fashion.
Portfolios containing gold are generally more robust and less volatile than those that do not.
Inflation hedge
Market cycles may come and go, but - over the long term - gold keeps its purchasing power. Its
value, in terms of the real goods and services that it can buy, has remained remarkably stable. In
contrast, the purchasing power of many currencies has generally declined due to the impact of
rising prices for goods and services. As a result, gold is often bought to counter the effects of
inflation and currency fluctuations.
Dollar hedge
Gold is often used as an effective hedge against fluctuations in the US dollar, the world's main
trading currency. If the dollar appreciates, the dollar gold price falls, while a fall in the dollar
relative to the other main currencies produces a rise in the gold price. While this may also be true
of other assets, gold has consistently proved among the most effective in protecting against
dollar weakness.
Risk management
On the whole, gold is significantly less volatile than most commodities and many equity indices.
In this respect it tends to behave more like a currency. Including assets with low volatility in a
portfolio will help to reduce overall risk, with a beneficial effect on expected returns. Risk
factors that may affect the gold price are quite different in nature from those that affect other
assets.
Demand and supply
As is true of all asset prices, gold's price moves in response to the changing balance between
supply and demand. Mine production is relatively inelastic due to the long lead times that exist in
gold mining, which explains why the rally in the gold price since 2001 has still not engendered
an increase in production levels. Meanwhile, demand has shown sustained growth, due at least in
part to rising income levels in gold's key markets. This has created the foundation for the most
positive outlook the precious metal has known for a quarter of a century.

Gold and inflation

The value of gold, in terms of the real goods and services that it can buy, has remained largely
stable for many years. In 1900, the gold price was $20.67/oz, which equates to about $503/oz in
today's prices. In the five years to end-December 2008, the price of gold averaged around $606.
So the real price of gold has endured a century characterised by sweeping change and repeated
geopolitical shocks and more than retained its purchasing power. In contrast, the real value of
most currencies has generally declined.
 Investors in gold can point to a growing body of research supporting gold's reputation as a
protector of wealth against the ravages of inflation. Market cycles come and go, but extensive
research from a range of economists has demonstrated that, over the long term, through both
inflationary and deflationary periods, gold has consistently maintained its purchasing power.
In the short run, experience has shown that gold can deviate from its long-run inflation-hedge
price, and, when enjoying a sustained buoyant period, as is currently the case, can offer
opportunities for impressive returns.

Gold and risk

Financial instruments usually carry three main types of risk.
• Credit risk: the risk that a debtor will not pay
• Liquidity risk: the risk that the asset cannot be sold as a buyer cannot be found.
• Market risk: the risk that the price will fall due to a change in market conditions.
Gold is unique in that it does not carry a credit risk. Gold is no one's liability. There is no risk
that a coupon or a redemption payment will not be made, as for a bond, or that a company will
go out of business, as for an equity. And unlike a currency, the value of gold cannot be affected
by the economic policies of the issuing country or undermined by inflation in that country. At the
same time, 24-hour trading, a wide range of buyers - from the jewellery sector to financial
institutions to manufacturers of industrial products - and the wide range of investment channels
available, including coins and bars, jewellery, futures and options, exchange-traded funds,
certificates and structured products, make liquidity risk very low. The gold market is deep and
liquid, as demonstrated by the fact that gold can be traded at narrower spreads and more rapidly
than many competing diversifiers or even mainstream investments.
Gold is of course subject to market risk, as is clear from the experience of the 1980s when the
gold price declined sharply. But many of the downside risks associated with the gold price are
very different to the risks associated with other assets, a factor which enhances gold's
attractiveness as a portfolio diversifier. For example, should a central bank announce its intention
to engage in substantial sales of gold, as happened prior to the Central Bank Gold Agreement in
1999, this would be unlikely to have an impact on equity returns but could reasonably be
expected to affect the gold price in the short run. Similarly, the specific risks to which bonds and
equities are exposed, including pressure on the health of the government and corporate sector
during an economic downturn, are not shared by gold.
One measure of market risk is volatility, which measures the dispersion of returns for a given
security or market index. The more volatile an asset, usually the riskier it is. The gold price is
typically less volatile than other commodity prices. This is because of the depth and liquidity of
the gold market, which are supported by the availability of large above-ground stocks of gold.
Because gold is virtually indestructible, nearly all of the gold which has ever been mined still
exists, much of it in near market form. This means that sudden excess demand for gold can
usually be satisfied with relative ease. And, unlike many other commodities such as, for
example, oil or platinum, the geographical diversity of modern mine production further reduces
the chances of supply shocks from any specific country or region having an undue impact on the
price. As a consequence, gold is generally slightly less volatile than heavily traded blue-chip
stock market indices such as the FTSE 100 or the S&P 500.

Gold's extensive appeal and functionality, including its characteristics as an investment vehicle,
are underpinned by the supply and demand dynamics of the gold market.
 Demand
Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the
Middle East accounted for 70% of world demand in 2008. 55% of demand is attributable to just
five countries - India, Italy, Turkey, USA and China, each market driven by a different set of
socio-economic and cultural factors. Rapid demographic and other socio-economic changes in
many of the key consuming nations are also likely to produce new patterns of demand.
 Jewellery demand
Jewellery consistently accounts for over two-thirds of gold demand. In the 12 months to
December 2008, this amounted to around US$61 billion, making jewellery one of the world's
largest categories of consumer goods. In terms of retail value, the USA is the largest market for
gold jewellery, whereas India is the largest consumer in volume terms, accounting for 24% of
demand in 2008.
Indian gold demand is supported by cultural and religious traditions which are not directly linked
to global economic trends. For more on the role of gold in India >>
It should be noted, however, that the economic crisis and the consequent recessionary pressures
that developed over 2007 and 2008 had a significant negative impact on consumer spending and
this, in turn, resulted in the reduced volume of jewellery sales, particularly in western markets.
Generally, jewellery demand is driven by a combination of affordability and desirability by
consumers, and tends to rise during periods of price stability or gradually rising prices, and
declines in periods of price volatility. A steadily rising price reinforces the inherent value of gold
jewellery, which is an intrinsic part of its desirability. Jewellery consumption in the developing
markets was, until fairly recently, expanding quite rapidly following a period of sustained
decline, although recent economic distress may have stalled this growth. But several countries,
including China, still offer clear and considerable potential for future growth in demand.

Investment demand
Because a significant portion of investment demand is transacted in the over-the-counter market,
it is not easily measurable. However, there is no doubt that identifiable investment demand in
gold has increased considerably in recent years. Since 2003 investment has represented the
strongest source of growth in demand, with an increase in the last five years in value terms to the
end of 2008 of around 412%. Investment attracted net inflows of approximately US$32bn in
2008.
There are a wide range of reasons and motivations for people and institutions seeking to invest in
gold. And, clearly, a positive price outlook, underpinned by expectations that the growth in
demand for the precious metal will continue to outstrip that of supply, provides a solid rationale
for investment. Of the other key drivers of investment demand, one common thread can be
identified: all are rooted in gold's abilities to insure against uncertainty and instability and protect
against risk.
Gold investment can take many forms, and some investors may choose to combine two or more
of these for flexibility. The distinction between buying physical gold and gaining exposure to
movements in the gold price is not always clear, especially since it is possible to invest in bullion
without actually taking physical delivery.
The growth in investment demand has been mirrored by corresponding developments in ways to
invest and there are now a wide variety of investment products to suit both the private and
institutional investor. More on how to invest >>

Industrial demand
Industrial, medical and dental uses account for around 11% of gold demand (an annual average
of over 440 tonnes from 2004 to 2008). Gold's high thermal and electrical conductivity, and its
outstanding resistance to corrosion, explain why over half of all industrial demand arises from its
use in electrical components. Gold's use in medical applications has a long history and today,
various biomedical applications make use of its bio-compatibility, resistance to bacterial
colonization and corrosion, and other attributes. Recent research has uncovered a number of new
practical uses for gold, including its use as a catalyst in fuel cells, chemical processing and
controlling pollution. The potential to use nanoparticles of gold in advanced electronics, glazing
coatings, and cancer treatments are all exciting areas of scientific research.
For more on industrial and scientific applications of gold >>
For the latest on the industrial markets and growing uses for gold visit www.utilisegold.com.
www.utilisegold.com

Supply
Mine production
Gold is produced from mines on every continent except Antarctica, where mining is forbidden.
Operations range from the tiny to the enormous and there are several hundred operating gold
mines worldwide (excluding mining at the very small-scale, artisanal and often ‘unofficial’
level). Today, the overall level of global mine production is relatively stable, averaging
approximately 2,485 tonnes per year over the last five years. New mines that are being
developed are serving to replace current production, rather than to cause any significant
expansion in the global total.
The comparatively long lead times in gold production, with new mines often taking up to 10
years to come on stream, mean mining output is relatively inelastic and unable to react quickly to
a change in price outlook. The incentives promised by a sustained price rally, as experienced by
gold over the last seven years, are not therefore easily or rapidly translated into increased
production.

Recycled gold (scrap)

Although gold mine production is relatively inelastic, recycled gold (or scrap) ensures there is a
potential source of easily traded supply when needed, and this helps to stabilise the gold price.
The value of gold means that it is economically viable to recover it from most of its uses; at least,
 that is, where it is in a form that is capable of being, if need be, extracted, then melted down, re-
refined and reused. Between 2004 and 2008, recycled gold contributed an average 28% to annual
supply flows.

Central banks
Central banks and supranational organisations (such as the International Monetary Fund)
currently hold just under one-fifth of global above-ground stocks of gold as reserve assets
(amounting to around 29,600 tonnes, dispersed across 110 organisations). On average,
governments hold around 10% of their official reserves as gold, although the proportion varies
country-by-country.
Although a number of central banks have increased their gold reserves in the past decade, the
sector as a whole has typically been a net seller since 1989, contributing an average of 447
tonnes to annual supply flows between 2004 and 2008. Since 1999, the bulk of these sales have
been regulated by the Central Bank Gold Agreement/CBGAs (which have stabilised sales from
15 of the world's biggest holders of gold). Significantly, gold sales from official sector sources
have been diminishing in recent years. Net central bank sales amounted to just 246 tonnes in
2008.
For more on Central Bank gold holdings >>
For quarterly Reserve Asset statistics >>
Read about Gold Demand Trends in our detailed briefing note, which also includes commentary
on supply.

Gold production
The process of producing gold can be divided into six main phases: finding the ore body;
creating access to the ore body; removing the ore by mining or breaking the ore body;
transporting the broken material from the mining face to the plants for treatment; processing; and
refining. This basic process applies to both underground and surface operations.
The world's principal gold refineries are based near major mining centres, or at major precious
metals processing centres worldwide. In terms of capacity, the largest is the Rand Refinery in
Germiston, South Africa. In terms of output, the largest is the Johnson Matthey refinery in Salt
Lake City, US.
Rather than buying the gold and then selling it onto the market later, the refiner typically takes a
fee from the miner.
Once refined, the bullion bars (with a purity of 99.5% or higher) are sold to bullion dealers who,
in turn, trade with jewellery or electronics manufacturers or investors. The role of the bullion
market at the heart of the supply-demand cycle - instead of large bilateral contracts between
miner and fabricator - facilitates the free flow of metal and underpins the free market
mechanism.

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 coins to complex structured financial
 products, the most appropriate way will depend on the requirements and outlook of the
individual investor.
Coins and small bars

Exchange-traded gold

Gold accounts

Gold certificates

Gold orientated funds

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.
If you are thinking about investing gold, it is worth giving the same consideration to your
purchase as you would to any other investment. The following list of questions is provided as a
guide to help you decide on the channel or channels that would be most appropriate for you.
• Why have you decided to buy gold?
• Do you want a real asset that you can have physically available at all times or
do you simply want exposure to the gold price?
• Will you want to have the gold delivered to you or would you prefer to have it
stored in a vault?
• Do you have information about all the costs that may be involved? These
may include taxes, commissions, premiums, storage or insurance.
• Is the counterparty (the person or company from or through whom you will
be making the purchase) reliable and trustworthy?
• How does gold fit in with any other investments you may have?
• In an economic scenario thwart with uncertainty, the naturally optimistic are betting on the equity markets,
which offer bargain deals, while the pessimists are running for wealth protection, predicting darker days still
to come. In such a situation, it is the realist and opportune investor who can take advantage, as well as
prepare for the worst. This requires some financial planning to go into ones portfolio to finely balance
opportunity, prudence and safety. While safety is sought in many forms, one that comes to mind immediately
is the most time-tested of all assets, which can also hold its own no matter what: gold. Gold being the one
asset with a high intrinsic value, has in the past acted as hedges against inflation, currency debasement,
falling equity markets and even helped keep abreast the falling purchasing power of nations.
• While 2008 was pretty much gold’s year as a commodity and an asset class, it has now fallen from its all
time high and along with equities showed a sudden decline recently. The speculations surrounding this
range from the gold bubble bursting, correction in gold prices to gold losing its natural characteristics are all
partially true and yet none explain the complete picture. This is as the simple truth is that this entire
economic meltdown, which has led to erratic movement in various assets, defying their natural tendencies at
times, is basically what Nassim Nicholas Taleb refers to as a “black swan” event.
• While the history of the gold price movement is still being scrutinised, trying to understand as much as we
can about gold and the likely economic impact of this global meltdown is the best way one can prepare for
what is to come.
• Gold investments
• While Indians are by far the largest natural buyers of gold, we tend to have a major preference towards gold
jewellery when compared to some of its other forms. While these jewellery no doubt hold a high emotional
and intrinsic value in the world, they are not the smartest way to go in terms of investments. The main
reason for this is one: the uncertainty of quality and two: the high additional cost incurred for the making,
which in terms of an investment is pretty worthless if not harmful to the value of gold.
• The other options like buying gold coins or bars also pose a problem of quality, authenticity, storage and
even insurance, which increases the cost of the asset greatly.
• While banks, which sell gold, cut out some of these problems, the insurance issue still remains, as well as
the fact that banks do not buy back the gold they have sold.
• This leaves purchasers with a relatively illiquid form of gold, which then has to be independently sold to
either a jewel shop or another buyer. All in all, this brings us to gold exchange traded funds (ETF’s), which
tend to take away the hassle of storage and insurance both, since the gold is stored and insured by the
asset management company (AMC).
• The gold is also supposed to be authenticated and quality tested, providing investors a chance to invest
easily into this asset by merely purchasing units. These units are like shares and change in value as the
NAV moves up or down.
• The only downside is the psychological edge of owning psychical gold on your own is not there, unless the
units are redeemed via the fund.
• Swati Kulkarni, UTI Gold exchange traded fund (ETF) manager, felt, “Typically, gold ETF’s don’t take calls
on gold prices. They only provide investors with an alternative investment, and, irrespective of the gold price
movements, gold ETF’s will invest in gold. They also provide investors the most efficient exposure to gold.
This is a more sophisticated way to get exposure to gold as an asset class.”
• On the other hand, Arvind Chari, Quantum Gold ETF’s fund manager, opined, “A gold ETF is an easier way
to invest in gold. We use gold as portfolio insurance. Gold and gold ETFs both had a good year in 2008, and
even now we advice investors to have 10-20% of their portfolio invested in gold.
• The reason one may prefer gold ETFs over other forms of gold buying is as when compared, one finds,
banks don’t buy back the gold they sell, gold coins and bars are harder to store and verify for authenticity,
jewellery is more expensive due to the making charges, leaving gold ETFs as the preferred choice of
investment.
• Why gold?
• Swati believes “Gold as such does well when there is high risk aversion in the market and till that scenario
exists, gold will remain attractive. While currently, gold may not be reacting to every asset class like it
usually does, having a negative correlation to equities, debt and having a positive correlation to oil, in
another two to three years it will normalise. Gold will then continue to act as a hedge against inflation, falling
equities and currencies.
• While the gold high maybe over, it still remains a powerful asset class and until the world economy stabilises
and risk aversion settles down, it will not be bogged down.”
• Most investors would be aware that gold is a good hedge against inflation and the best insurance against
the markets. However, people may find it odd as to why are we discussing inflation when or falling equities
when the markets are looking attractively priced right now. This is mainly due to the high risks that many
nations are taking today, be it via offering huge stimulus packages as seen in the US or via increasing their
fiscal deficit as seen in the case of India. If either of these scenarios play out, the governments will be left
with little choice but to print more money, thereby creating inflation and destabalising the economy as well.
In such circumstances, inflation is bound to kick back in and sooner or later, investors will once again have
to turn to gold for solace.
• On elaborating as to why is gold so essential during the present circumstances, Arvind goes on to explain,
“While the world economy is facing a major crisis, right now people need protection. So many countries
these days are offering stimulus packages, which means these governments, in order to raise the money for
the stimulus packages, will start printing more money. This will debase the currencies and in such times gold
is the best protection one can have.
• People will be looking to go towards gold to maintain their purchasing power and combat higher inflation,
which maybe seen in the next year or so.”
• Gold in your portfolio
 • As far as building a portfolio goes, Swati felt, “If one does not have gold in their portfolio, then now is a good
time to acquire it, especially since gold prices are currently down, from their all time high last year. However,
from a three to five year perspective, equity will be a better class to invest in terms of returns.”
• Gold over the last few years had again come into focus as an asset class, especially in India where it has
been sought more in the form of jewellery. Most portfolio managers across the nation have been of the
opinion that one should at least allocate 10-20% of their portfolio towards gold, and adjust it accordingly as
the economic scenario becomes clearer.
• When discussing if gold is an asset worth investing in, Arvind feels “Gold is proving to be the safest asset in
such times. This is believed as it is the only asset, which will protect your investment value. This is essential
especially in such times. 20% allocation of ones portfolio, directed towards gold, especially via gold ETF’s, is
the best way to invest in gold.”
• Another reason for investing in gold now is due to the lower prices currently offered in the market. Also, if
one looks at the various mutual funds performance across the country over the past 12-14 months, one will
see that the top four funds are all gold exchange traded funds.
• After giving average returns of 25% or more last year, they continue to grow at a steady rate in comparison
to the other funds. However, when gold prices dipped after their all time high, these funds too took a hit in
their NAVs. However, if one looks at the last one week of mutual fund performances, then too gold ETFs
seem the best, having returns of 7-9% in the last 7 days.
• Skeptics of the gold ETF boom have felt that the ETF’s net asset values often move at way higher rates than
the gold price movement. Explaining the same, Arvind felt, “Sometimes due to trading of gold ETF units, the
gold ETF movement is higher or lower than the gold price movement. However, I feel this is only an intra-
day phenomena. Technically, gold ETFs and gold should move in tandem, especially since at the end of the
day, the NAV is based on the gold price.”
• Some of the ratios that gold is often compared to is the Dow-gold ratio, oil-gold ratio and dollar-gold ratio.
The Dow-gold ratio has a curious historical relevance, for it shows the ratio at its highest point once every 35
years. After this, the ratio steadily drops till it is below one. Currently, the ratio is at 7:1, almost with the Dow
in the 7,000’s and gold at a $1,000 level. If this is to now move towards below one, the gold price is bound to
rise, accompanied by the falling Dow. Oil on the other hand is usually closely related to gold in terms of
movements.
• However, now the ratio between them is the highest and this too is an anomaly of sorts. As far as the Dow-
gold ratio goes, Arvind felt, “The Dow-gold ratio is today at a critical phase. Historically, the ration reaches its
peak once every 30-35 years, after which the ration will fall to below one levels. This has happened from the
1920’s onwards and given that the ratio had peaked last year, this phase becomes important. For it could
mean that the Dow will drop drastically from its current 7,000 levels and gold will rise drastically from its
current $1,000 levels, if the ratio is to be below one.”
• All in all, whatever be the case with gold, the fact that it is the best hedge we have against the times ahead
is now a universal consensus. China has tripled its gold and so are other nations, who are now turning
towards refilling their gold treasuries. In such a case, retail investors too should revisit their portfolio and
insure it with a decent gold allocation.

Coins and small bars

The first gold coins were struck by King Croesus, ruler of Lydia in
western Asia Minor from 560 to 546BC, 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
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. The Gold Bars Worldwide website provides a wealth of additional
information regarding the international gold bar market.

Exchange-traded gold
Gold-backed securities
Gold is traded in the form of securities on stock exchanges in Australia, France, Hong Kong,
Japan, Mexico, Singapore, South Africa, Switzerland, Turkey, the United Kingdom and the
United States. By design, these forms of securitised 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.
 Futures and options
Gold futures
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
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. The largest are the New York Mercantile Exchange Comex Division
(recently rebranded CME Globex, after a merger between Chicago Mercantile Exchange and
NYMEX), the Chicago Board of Trade (part of CME) and the Tokyo Commodity Exchange.
Gold futures are also traded in India and Dubai.
The Commodity Futures Trading Commission provides extensive reports on derivatives trading
in the United States. Tradable commodity indices are based on fully collateralised baskets of
long-only commodity futures, all of which include a small allocation to gold.
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.
Warrants
In the past, gold warrants were mostly related to the shares of gold mining companies. Nowadays
commonly used by leading investment banks, they give the buyer the right to buy gold at a
specific price on a specific day in the future. For this right, the buyer pays a premium. Like
futures, warrants are generally leveraged to the price of the underlying asset (in this case, gold),
but gearing can also be on a one-for-one basis.

Gold accounts
Gold bullion banks offer two types of gold accounts - allocated and unallocated:
Allocated account
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 recognised 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
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 Plans
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
account is closed, investors can get their gold in the form of bullion bars or coins, and sometimes
even in the form of jewellery. Should they choose to sell their gold they can also get cash.

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 programme that is guaranteed by the government of
Western Australia and is distributed in a number of countries.
1. Gold is more than just another commodity, it’s a currency. It is THE currency that evolved
in the marketplace over the last 5,000 years.

Gold was the main currency in most of Europe, Asia and the Americas for most of the last few thousand
years, up until 1971. Silver was also widely used, though to a lesser extent.
Gold evolved independently as money in the world’s main civilizations, because it is:
1. Rare
About 5 parts per billion of the earth’s crust. Difficult and expensive to mine.
2. Indestructible
It does not tarnish or decay.
3. Compact
If all the gold ever mined were made into a solid block whose base was the size of a
football field, then it would be about 1.5 meters (5 feet) high.
4. Malleable and divisible
You can easily reshape it, flatten it, and divide it into tiny pieces.
5. Hard to find
The amount of mined gold has increased only slowly, rarely more than 2% per year.

Until 1971, government currencies were backed by gold. You could, at any time, exchange a unit of any
of the world’s main government currencies (such as a dollar, a yen, a pound, or a rupee) for a prescribed
amount of gold. Currency notes were just certificates for various weights of gold. For example, from 1934
to 1971 you could exchange 35 US dollars for one ounce of gold.

Progressively from 1913 to 1971 governments withdrew the right to exchange government currency for
gold. For example, from 1944 to 1971 a non-US currency unit (such as a yen or a pound) could only be
exchanged for US dollars, and only national governments could go to the US government to exchange
those US dollars for gold.

In 1971 President Nixon of the United States broke that nation’s promise to always exchange 35 US
dollars for an ounce of gold. Since then the world’s government currencies have been ‘fiat’ currencies
(see point 2 below)— they are not defined as a weight of gold, they have no connection to any commodity
or anything tangible, and they are only worth what someone else is prepared to trade for them. The fiat
currencies now ‘float’ against one another, with their relative values going up and down with economic
trends or fashions.

The only significant use of gold today is for investment, that is, as a currency or a store of value. This
includes jewelry—the fundamental purpose of gold jewelry is to store something valuable in your personal
safekeeping. Gold has some non-investment uses such as in electronics, but the amount of gold used in
these ways is relatively tiny. Almost all the gold ever mined is still in use today. Silver is different—the
industrial uses of silver (photography, utensils, medicinal, electronics) outweigh its investment use, and
much of the silver ever mined has been effectively lost because it is hard to recover.

2. Gold and silver are the only currencies not created and controlled by governments. All
of today’s other currencies (dollars, euros, yen, pounds, renminbis, rupees, etc) are
‘fiat’ currencies, which means they do not represent anything tangible but are only
 worth something due to government decree (namely legal tender laws).

All today’s government currencies are ‘fiat’ currencies. A fiat currency is defined and created by a
government. It is given meaning only by legal tender laws—national laws that say that the fiat currency
has to be accepted as payment in that country, and thus force people to use the fiat currency.

The term ‘fiat currency’ came about because the legal tender laws that give it value are a ‘fiat’ (or
authoritative pronouncement) of government. A fiat currency is a currency brought into existence by
government decree (that is, by fiat).

The value of gold, on the other hand, is independent of any government laws. Unlike fiat currencies, gold
is accepted as valuable without needing protection by laws.

3. Governments always end up creating too much fiat currency out of thin air. All fiat
currencies in the past have ended up worth very little, collapsing into hyperinflation or
threatening to. All of today’s fiat currencies have been fiat currencies for less than 34
years (all government currencies were convertible to gold until 1971).

Fiat currency is created at the whim of politicians and bureaucrats. History’s lesson on this point is clear:
those in charge of a fiat currency always, eventually, due to some urgent government priority, create too
much of the currency and it becomes worth less, and ultimately worthless.

As a government creates more of its fiat currency then there is an increasing amount of currency to pay
for the same amount of goods and services, so the prices of the goods and services rises. The increase
in the quantity of currency is called ‘inflation’, and the consequent rise in prices is measured to some
degree by the CPI (consumer price index). The ‘value’ of a currency (how many goods and services a unit
of the currency can buy) depends in the long run on how much the country’s government inflates its
currency.

Gold, on the other hand, treats everyone equally. Unlike fiat currency, no one can conjure gold up out of
thin air to spend for themselves and get others to do their bidding. Gold has to be mined, ounce by hard-
won ounce. Because the supply of gold can only ever increase slowly, prices in terms of gold tend to stay
roughly constant for centuries—changing mainly due to technological influences that make some goods
relatively easier or harder to make.

There have been hundreds of fiat currencies in the past, in various countries at various times. In every
single case, the currency eventually became worth much less and was abandoned because the people in
charge of making it eventually succumbed to the temptation of making far too much of it.
Tanishq is a very interesting brand. Interesting because it is a brand that is trying to
change the rules of an industry which is very fragmented. Tanishq is one of the first
brands to create a national brand in the Rs 40,000 crore Indian Jewelery market.

The Indian jewelery market is huge and India is the second largest consumer of gold
trailing behind USA. But the jewelery market is highly fragmented. The branded
jewelery segment is hardly 5% of the total market.

Tanishq was launched in 1995. Since then , the brand has grown to a Rs 1200 crore
brand even overtaking Titan watches interms of the turnover.
Tanishq is a retail brand. It is the chain of jewelery shops set up by Titan across the
country. According to the company website, Tanishq has more than 104 stores across 71
cities. The chain is operating through a franchise system.

Titan has also another brand of retail outlets which is known as Gold Plus which is
targeting the urban/semiurban consumers and small towns. Gold Plus has presence in
more than 20 towns and Titan is planning a major expansion of these stores.

Titan planned to venture into gold business way back in late 1980's. During that period
of foreign exchange crisis, a good way to earn the valuable foreign exchange was through
gold business. But by the time the company figured out the business, the foreign
exchange problem was over.

Although the jewelery market is large, doing business in this segment is not a cake walk.
The market is complex and highly unorganized. The consumer behavior is also different
compared to what we see in other products and categories.

Consumers tend to see gold as an investment and indulgence. Most of the individual
consumers are loyal to their local jeweler /goldsmith. And for a brand like Tanishq, it
had to break this traditional consumer buying process and also make them switch their
loyalty from the goldsmith to the retailer.

In the state of Kerala where I live, the market is more organized. There are large chain of
jewelers who have their presence across the state. Consumers tend to buy from these
retail chains rather than make the gold jewelery from a gold smith.

Tanishq started off selling 18 carat gold jewelers. The brand at that time was positioned
as a jewelery for daily wear . But the brand ran into difficulties since the consumers were
too sticky about 22 carat ornaments. The light weight jewelery was still alien to the
consumers.

Tanishq was depending heavily on the pull factor. The brand relied on the design
ranges, the trust that the Tata brand carries and also the reliability factor.
One of the major hurdles that the brand faced was the brand recognition during its
initial stages. People did not know about the Tanishq brand . Since gold is a high value-
high involvement purchase, consumers were risk averse in trying out a new retail format
like Tanishq. The consumers were also less responsive to the premium that Tanishq
jewelery commanded.

It takes lot of time to change the consumer perception. It is harder if this behavior is
rooted in tradition. Gold retailing is heavily rooted in tradition. If we look at the genesis
of local jewelers, most of them have a long tradition and their business and clientele has
been built over generations.
Since the pricing of gold jewelery is tricky and complex, consumers also tended to rely
on their traditional store rather than experimenting with new stores.
But these have changed in recent times. The stores has been exploiting the consumers
by complex pricing policies like " making charges", value addition etc which an ordinary
consumer seldom understand.Tanishq has been trying to tap on this need for a honest
gold retailer.

Along the way , the brand also had to fight the perception of being a premium brand. In
a classic case of over positioning, the brand had to convince the consumer that Tanishq
had jewelery which was affordable. Over positioning is where the brand narrowly
positions itself and consumer tend to have a narrow image of the brand.

To tide over this issue, Tanishq came out with small priced collections which to an
extend corrected the perception problem.
According to the company website, Tanishq had a turnover of over Rs 1200 crores.

The brand is very active across the media. Tanishq have a two prong branding strategy.
The company have the main brand Tanishq and lot of sub brands for its different
collections. Some of these brands are Solo, Aria, Diva , Collection G etc.
Tanishq recently roped in the new Bollywood diva Asin to endorse a collection.To tide
over the issue of low margins, Tanishq has recently launched the diamond collection
which is considered to be a high margin product line.
Tanishq has been trying to differentiate on the designs. It had built lot of product lines
and has branded these lines. The brand feels that consumers will chose Tanishq for its
designs.

Regarding the promotional strategies, Tanishq have the major issue is fighting the
regional players. Consider the Kerala example, the brand Tanishq have zero visibility
compared to the local