PRINCIPLES OF MANAGEMENT

GOLD AND GOLD RELATED

INVESTMENT OPTIONS

F. Y. B.M.S

GROUP NO-3

112 KHUSHBOO JOSHI

114 NIMISHA KANSARA

115 NIRAJ KAPADIA

116 MURTUZA LILIYAWALA

120 KAPIL PANDYA

PROF. SHILPA PESHWANI

 MATUSHRI PUSHPABEN VINUBHAI
VALIA COLLEGE OF COMMERCE

INDEX

SR.NO. PARTICULARS
1. INTRODUCTION
2. APPLICATIONS
3. FACTORS AFFECTING GOLD
PRICES
4. GOLD: A RELIABLE
INVESTMENT OPTION
5. GOLD INVESTMENT OPTION
- ETFs
- GOLD MUTUAL FUNDS
- OTHER
6. ADVANTAGES OF INVESTING
IN GOLD
7. GOLD BETTER THAN EQUITIES
8. BIBLOGRAPHY
INTRODUCTION

Meaning:

Gold is a chemical element with the symbol Au

(Latin: aurum) and atomic number 79. It is a highly
sought-after precious metal, having been used as
money, as a store of value, in jewelry, in
sculpture, and for ornamentation since the
beginning of recorded history. The metal occurs as
nuggets or grains in rocks, in veins and in alluvial
deposits. Gold is dense, soft, shiny and the most
malleable and ductile pure metal known. Pure gold
has a bright yellow color traditionally considered
attractive.

Characteristics:

Gold is the most malleable and ductile of all

metals; a single gram can be beaten into a sheet
of one square meter, or an ounce into 300 square
feet. Gold leaf can be beaten thin enough to
become translucent. The transmitted light appears
greenish blue, because gold strongly reflects yellow
and red.

Electron shell diagram of gold.

Gold readily creates alloys with many other metals.

These alloys can be produced to increase the
hardness or to create exotic colors. Gold is a good
conductor of heat and electricity, and is not
affected by air and most reagents. Heat,
moisture, oxygen, and most corrosive agents have
very little chemical effect on gold, making it well-
suited for use in coins and jewelry; conversely,
halogens will chemically alter gold, and aqua regia
dissolves it via formation of the chloraurate ion.
Color of gold

Mainly, Gold appears to be metallic yellow. Gold,

caesium and copper are the only elemental metals
with a natural color other than gray or white. The
usual gray color of metals depends on their
"electron sea" that is capable of absorbing and re-
emitting photons over a wide range of frequencies.
Gold reacts differently, depending on subtle
relativistic effects that affect the orbitals around
gold atoms.

Different colors of Ag-Au-Cu alloys.

Applications

As the metal

Medium of monetary exchange

In various countries, gold is used as a standard for

monetary exchange, in coinage and in jewelry. Pure
gold is too soft for ordinary use and is typically
hardened by alloying with copper or other base
metals. The gold content of gold alloys is measured
in carats (k), pure gold being designated as 24k

Special issue Canadian Gold Maple Leaf coin with

the highest purity of any gold coin at a guaranteed
99.999%

Gold coins intended for circulation from 1526 into

the 1930s were typically a standard 22k alloy
called crown gold, for hardness. Modern
collector/investment bullion coins are typically 24k.
The special issue Canadian Gold Maple Leaf coin
contains the highest purity gold of any bullion coin,
at 99.999% (.99999 fine). Since the abandonment
of the gold standard and the confiscation of
monetary gold in the 1930s by the United States
Government, gold has not generally been used in
daily commerce. Many holders of gold coinage
retain their gold in storage as a hedge against
inflation or other economic disruptions.

Jewelry

Because of the softness of pure (24k) gold, it is

usually alloyed with base metals for use in jewelry,
altering its hardness and ductility, melting point,
color and other properties. White 18 carat gold
containing 17.3% nickel, 5.5% zinc and 2.2%
copper is silver in appearance. Nickel is toxic,
however, and its release from nickel white gold is
controlled by legislation in Europe. Alternative
white gold alloys are available based on palladium,
silver and other white metals (World Gold Council),
but the palladium alloys are more expensive than
those using nickel.

Medicine

In medieval times, gold was often seen as

beneficial for the health, in the belief that
something that rare and beautiful could not be
anything but healthy. Some gold salts do have anti-
inflammatory properties and are used as
pharmaceuticals in the treatment of arthritis and
other similar conditions. However, only salts and
radioisotopes of gold are of pharmacological value,
as elemental (metallic) gold is inert to all chemicals
it encounters inside the body.In modern times
injectable gold has been proven to help to reduce
the pain and swelling of rheumatoid arthritis.

Food and drink

Gold leaf, flake or dust is used on and in some

gourmet foodstuffs, notably sweets and drinks as
decorative ingredient. Gold flake was used by the
nobility in Medieval Europe as a decoration in
foodstuffs and drinks, in the form of leaf, flakes
or dust, either to demonstrate the host's wealth
or in the belief that something that valuable and
rare must be beneficial for one's health.

Industry

Gold is used for joining the components of gold

jewelry by high-temperature. By using the hard,
high-melting point solder first, followed by solders
with progressively lower melting points, goldsmiths
can assemble complex items with several separate
soldered joints.

Gold can be made into thread and used in

embroidery.

Gold is ductile and malleable, meaning it can be

drawn into very thin wire and can be beaten into
very thin sheets known as gold leaf.

Gold produces a deep, intense red color when used

as a coloring agent in cranberry glass.

In photography, gold toners are used to shift the

color of silver bromide black and white prints
towards brown or blue tones, or to increase their
stability. Used on sepia-toned prints, gold toners
produce red tones. For example, Kodak published
formulas for several types of gold toners, which
use gold as the chloride (Kodak, 2006).

As gold is a good reflector of electromagnetic

radiation such as infrared and visible light as well
as radio waves, it is used for the protective
coatings on many artificial satellites.

Production

The major producers of gold are the United

States, Australia, China, Russia and Peru. The
world's oceans hold a vast amount of gold, but in
very low concentrations (perhaps 1–2 parts per 10
billion). A number of people have claimed to be
able to economically recover gold from sea water,
but so far they have all been either mistaken or
crooks. The average gold mining and extraction
costs are $238 per troy ounce but these can vary
widely depending on mining type and ore quality. In
2001, global mine production amounted to 2,604
tones, or 67% of total gold demand in that year.
At the end of 2006, it was estimated that all the
gold ever mined totaled 158,000 tones. This can
be represented by a cube with an edge length of
just 20.2 meters.

At current consumption rates, the supply of gold is

believed to last 45 years.

Price records

Since 1968 the price of gold on the open market

has ranged widely, from a high of $850/oz
($27,300/kg) on January 21, 1980, to a low of
$252.90/oz ($8,131/kg) on June 21, 1999 (London
Gold Fixing). The 1980 high was not overtaken until
January 3, 2008 when a new maximum of $865.35
per troy ounce was set (a.m. London Gold Fixing).
The current annual record price was set on March
17, 2008 at $1023.50/oz (am. London Gold
Fixing).
FACTORS AFFECTING GOLD PRICES:

High Inflation: In times of high inflation, people

tend to invest in commodities, gold being
the most popular among all commodities. This is
also the time when the economy and stock market
or mutual fund investments do not do well and gold
investments can provide a good hedge for your
investment portfolio.

Low interest rates: This is somewhat similar to the

above factor. When the interest rates are low (as
compared to the inflation), especially less than the
inflation, then the demand for gold increases.

Human sentiment: This is an irrational but

significant and the most difficult to predict factor
which can influence the price of gold. Because of
this factor it is also easier to have 'temporary
gold bubble'.

 How is the dollar related to gold in the Indian

context?

India is a net importer of gold. The domestic

production is almost negligible. And India is the
highest consumer of gold in the world. Hence any
fluctuation in the foreign exchange market affects
the price of gold.

Why does the dollar move inversely to gold?

Currently, the dollar is the only international
currency with nothing besides gold to challenge it.
Besides being a commodity, gold is a universally
accepted form of money.

All central banks around the globe hold gold as

part of their foreign reserve besides foreign
exchange and statutory drawing rights. As on
December, 2003, the US holds almost 58.2 per
cent of its reserves in gold. And it is the highest
in the world followed by France at 55 per cent and
Germany at about 45 per cent.

The US dollar has flagged in recent months despite

fairly robust US economic data due to fears of a
widening account deficit and low interest rates.

Most of the countries have invested substantially in

the US treasury markets. The danger for the US
treasury is that institutional investors such as the
central banks of Japan, China and others are
becoming disenchanted with their low yields and
declining prices in their dollar-denominated
holdings. This is going to push them towards hard
assets such as gold. In the process, the demand
for gold will shoot up and so will the prices.

Gold: A reliable investment option

It is undeniable that gold has been viewed as one
of the oldest and most valuable commodity in the
world. It is universally understood that not only
does it look good when made into precious articles
of jewelry, the habit of investing in gold can also
bring the investor untold riches because gold is one
of the most stable material in the category of
precious metals. The gold market has always been
bullish and is steadier when compared to other
investment means such as the stock market and the
FOREX scene. Other commodities such platinum and
palladium in the base metals category are not a
preferred means of investment because they are
too easily influenced by the state of the world
economy. Gold is not affected easily because it is
a universal currency recognized by every single
bank across the world.
 Why buy gold?

Here are three solid reasons why buying gold may

be your best investment move ever:

 Gold can protect you against the weakening

currency.
No matter which country you originate from, there
is a chance that your country’s currency will suffer
a downfall at a particular point of time. Gold, on
the other hand, retains its true value and can help
you protect your riches because it does not rely on
the state of the country’s economic, whether it is
on the up or downtrend. Take the US dollar for
example. For years now, terrorism and political
rife have caused the dollar to appear very unstable
and perhaps, increasingly undesirable. When the
US dollar continued its decline between the years
2003 and 2004, the value of gold continued to
ascend.

 Gold is your wealth insurance during wars, natural

disasters and political unrest.
If you have previously invested in the stock market
or the FOREX market, you would realize that
financial markets such as these are very easily
affected by global happenings such as terrorism
and war. The 9/11 calamity is a good example how
financial markets can be at a standstill for
extended periods of time and can cause billions of
dollars of investment funds to be lost. Gold, on the
other hand, will maintain its stability even when
times are bad.

 Gold provides excellent price appreciation and

untold profits.

After the infamous stock market bubble burst

during the early turn of the millennium, many
investors realized that they are better off putting
their equity in something more stable and enriching
to their investment portfolio. And unlike other
financial markets, investors can invest in gold for
better peace of mind as they need not worry about
the consequences that come with inflation.

 What makes gold such a precious commodity?

There are many savings and investment options
available in India. The answer lies in the fact of
this yellow metal being a rarity. Since the supply
of gold is always lower than the demand that is
commands in the market the prices of gold always
remain high and stable. Gold can be used in various
forms to utilize its potential; in the form of an
investment, as a trading commodity, in the form of
futures, as bullions etc. this trading of gold is
carried out in a similar manner as done during the
trade of other currencies. The major factor aiding
in the trade of gold is speculation and since the
demand of this metal out does the amount
extracted the rates of bullion will always be on a
high.

A diversified portfolio has the

maximum chance of allowing you to reap maximum
benefits. Including gold as one of the options in
investment is an intelligent step. Also, one should
diversify the gold investments into various gold
options rather than investing in one physical chunk
of this metal. In the present time gold is basking
under the glory of it reaching its all time high
levels augmented by a weakening dollar. Those who
had chosen gold as an investment option some 5
years ago would have plenty of reasons to feel
happy right now while for those wishing to enter
the market right now and are getting hesitant with
the rise in gold’s prices the best way for them
would be incremental buying over a period of time.

Gold is likely to provide stability and also to give

reasonable returns. After all, it is the only store
of value that investors trust during most crises:
economic or otherwise.

This is one form of investment that did not

disappoint investors even in 2008. Though it pretty
much ended the year ($ 869 an ounce) at the same
level it started the year with ($ 846.75 an ounce)
it did hit a high of $ 986 an ounce in July (one
ounce = 28.3495231 grams). Irrespective of the
gains made by gold the commodity will always be a
preferred option for investors wanting to protect
themselves against inflation. Here again, gold is
likely to be volatile and hence a systematic
investment approach could be used.
 Is gold a safe investment option?

While equity, debt and real estate may form the

core of your portfolio, investing in gold is a wise
option. You don’t have to follow the market trends
like in stocks, the gold prices have been volatile
but well within ranges and experts say that there
will be further appreciation.

The key driver for gold prices is the gross

mismatch between demand and supply. We are the
biggest buyers of gold in the world. They are also
linked to the strength of the dollar. With the
dollar weakening and expected to continue doing so,
the demand and price of gold would only rise. The
price of gold is expected to rise also because the
cost of production is rising.

 What kind of gold should you buy?

Indians are the largest buyers of gold in the

world. Gold can be bought in various forms and the
decision should be based on the reason you need
gold. For investment purposes you could buy gold
bars, biscuits and coins or even in dematerialized
form.
The disadvantage of buying gold in the form of
jewellery is that its resale is not always a
profitable proposition. The jeweler discounts what
you paid as ‘making charges’ from the value of the
jewellery. This cuts a significant part (upto 40%)
of your investment. The second disadvantage is
that most jewelers do not give you cash in lieu of
your gold. Instead they allow you to exchange it
for gold jewellery or a bar or a coin. Gold bars and
biscuits are priced at market value and can easily
be exchanged for cash.
These days’ people also go in for dematerialized
gold from a commodity. The National Commodity
and Derivatives Exchange has introduced 100 gram
gold futures. With this the investors can take
positions in gold and can take physical delivery on
the contract’s expiry. You could also enter and exit
the market to square off your position before the
contract closes. Dematerialization eliminates the
risks related to physical storage and theft and
facilitates easy transfer of holdings through the
electronic mode.

 How to invest in Gold?

There has been a lot of discussion about Gold as
an investment class and for people who are
interested in buying - gold, there are several
options.

Gold investment options:

Not many people know that there are various

investment options in gold like gold bars,
numismatic coins, and gold accumulation plans by
banks and financial institutions, and gold mutual
funds. Across the world, several investment options
are available for investors to put their money in
the yellow metal.
Gold Coins

Buying gold directly is slightly more

complicated than you may expect.
This is because there are several
different types of gold products,
and different dealers offer them
at different prices. Gold coins and Swiss Gold
bars are common ways of buying gold
directly.

Here is a list of popular gold coins:

1. American Gold Eagle Bullion Coins

2. Canadian Gold Maple Leaf

3. Kruger rand Gold Coins

Gold bars are also a very popular way of buying

gold directly. There are two popular types of gold
bars:

1. Swiss Pamp Gold Bars

2. Credit Suisse Gold Bars

Gold coins and gold bars can be bought directly

from the US Mint, and other gold dealers - both
online and in stores.
ETF’s:
WHAT ARE GOLD ETFs?

Gold exchange-traded funds are ideal for retail

portfolios. By buying their units, investors can own
gold at a low cost without bothering about keeping
it safe.
The investment objective of gold exchange-traded
funds (GETF’s) is to provide returns that closely
mimic the returns from buying and selling of
physical gold. The fund house buys physical gold
through its authorised participants. It then breaks
up the value of this gold into small units, usually
one gram or so. GETF pricing is transparent. A unit
of the fund, which will be valued as per the rate
of gold on that day, can be bought and sold
through the stock exchange. Transactions in
dematerialized gold are just like those in shares
and just as easy. As units are bought and sold
through the stock exchange, systematic investment
plans are not available. The fund charges investors
a small expense to manage itself.
Buying GETF units is a low cost way of owning gold
that also rids you of concerns of securing physical
gold and keeping it safe. This is an ideal way for
retail investors to augment the gold content of
their financial portfolios. In theory, a large
investor can bring physical gold to the authorized
participant and have an equivalent number of units
of GETF issued. When he sells, he can collect the
amount of gold his units are worth. Since this
involves a lot of problems, one of them being
verification of the purity of gold, this option has
not been allowed in practice so far.

Example: Currently, Benchmark Asset Management

(Gold BeES), Kotak Mutual Fund (Kotak Gold),
Reliance Mutual Fund (RGETF), UTI Mutual Fund
(Gold Share) and Quantum (Quantum Gold Fund)
offer GETFs in India.

Glittering gold has overshadowed all other asset

classes this year and shimmering to glory are the
Gold Exchange-Traded Funds (ETFs) that came into
the market only last year and mirror gold returns.
But it has not yet found many takers as compared
to physical gold.

Gold ETFs were first launched in March 2007 and

completed a year of phenomenal rally thanks to
mounting gold prices. As these funds trade on the
underlined price of gold, they have given average
returns as high as 24% in the last one year with
the precious metal appreciating from 10,000 levels
for 10 grams of gold to 13,500 levels this year.
As the demand-supply mismatch continues, the
prices are expected to rise.

India is one of the largest consumers of gold.

Nearly 800 ton of gold is imported every year.
Indians account for 23% of the world’s total annual
demand for gold. While conventional investment
options like jewelry, gold bars and coins still exist,
Gold ETFs are another effective way to invest in
the yellow metal. But while demand of gold has
risen 15% YoY, gold ETFs have still found few
takers even after much fanfare.

You can invest in gold by buying gold ETFs. Here is

a list of some Gold ETFs.

1. SPDR Gold Trust ETF (NYSE: GLD)

2. ISHARES COMEX GOLD (NYSEArca: IAU)

3. POWERSHARES DB GOLD (NYSEArca: DGL)

COST BENEFITS

ETFs give investors the opportunity of buying as

less as 1 unit on the exchange. Since investors can
enter the trade through brokers, there is no entry
or exit load and brokerage expenses are not very
high. This is favorable in comparison to mutual
funds, which have a defined load structure, entry
and exit loads and other expenses. However, things
like minimum unit size vary for investors who invest
in ETF via asset management companies.

Experts say if you are looking at gold as an asset

class purely for investment, Gold ETFs prove to be
a much more investor friendly option and are
expected to address issues of higher prices of
physical gold, purity and cost of insurance.

GOLD MUTUAL FUNDS

The scheme is yet to get the regulator's approval,
but it is worth noting that WGC has launched more
or less similar schemes recently in the US and
Europe. The passive investment scheme in gold
would be an exchange traded scheme -- an open-
ended fund, and will be listed on the exchange in
the form of an exchange-traded fund tracking the
domestic prices of gold through investments in debt
paper linked to gold prices.

The scheme would be designed to provide returns,

which would closely correspond to the returns
provided by gold. Each unit being offered will have
a face value of Rs.100 each or equivalent to the
price of 1 gram of gold (about Rs.500) and will be
issued at a premium equivalent to the difference
between the allotment price and the face value.

Units allotted under the scheme are listed on the

stock exchanges and can be bought/sold like any
other stock on the National Stock Exchange of
India Ltd or on any other exchange where it is
listed. The authorized participants and large
investors will be able to directly buy or sell with
the fund in creating units.

It provides efficient arbitrage between the traded

prices and the NAV, thereby reducing the
incidence of such units being traded at a
premium/discount to NAV.

Moreover, the units are available in dematerialized

form, which help consolidate them with other
portfolio holdings and also eliminate the need for
and risk of physical storage. On the other hand,
the new gold savings account being worked out by
the WGC in conjunction with banks

OTHER INVESTMENTS

The hassle of storing gold in a safe place and the

cost attached to such storage is forcing investors
to look for alternative investments in gold apart
from holding the metal in physical form.

Apart from investment in gold coins and bars, the

other investment options include mutual fund
schemes, gold deposit schemes or gold mobilization
schemes, gold-denominated certificates (similar to
that of promissory notes issued generally by
leading established jewelers) and exchange traded
funds.

While most of these avenues are yet in the

pipeline,watch out for them. All or any of them
can be launched soon.

The gold mobilization scheme by banks has not

taken off in the country but new gold deposit
schemes are in

the offing. Besides, mutual funds are planning

schemes dedicated to investments in gold.
 Leading jewelers already have monthly and yearly
gold recurring schemes. Banks are also looking at
issuing gold-denominated certificates, which can be
bought in cash and redeemed in gold. WGC has
already initiated efforts in this direction.

Advantages of Investing in a GOLD MUTUAL

FUND and GOLD ETF:

It is much more hassle free as compared to buying

physical gold. Buying / selling gold from the market
takes much more effort and time.

The second advantage is storing. If you buy physical

gold, you have to store in your house.
Thirdly, you can do transactions on denomination in
Gold ETF because here you can buy even one unit.
While in physical gold buying1 gram and adding them
is painful because you have to melt it to make a
bigger coin or bar and that takes away some value
out of it,”

More affordable for small investors than buying gold

futures on commodities exchange. Gold futures are
typically in lots of 1kg, while the price of Gold ETF
is typically 1 gram (sometimes even 1/2 gram) of
gold.

Trading and investing in Gold ETFs is a matter of a

few clicks once you have a DEMAT account and an
online trading account.

* Gold savings accounts: They operate like regular

bank accounts where the customers account is
credited with balances of gold and withdrawals can
be either in the form of gold coins or currency
equivalents.

* Gold accumulation plan: A monthly debit from

customer's savings account is backed by 100 percent
Physical gold.

* Gold chits: Also there are gold chits run by

jewelers where at the end of the year, housewives
can buy gold jewelry or coins from the same jeweler
worth the total money they have paid in installments.

* Gold deposit scheme: It is one of the options to

invest in gold where one can keep gold in banks for
specified period like a fixed deposit and can claim as
and when required .But it is not like pledging as the
ornaments will not be returned in its original form
because the banks melt them and rent to the
industry.

* I-gold: An investor can purchase gold from a stock

broker as just as he used to buy equity shares.

* Mutual funds and Buying gold as ornaments are

other options.

Realizing the potential for Gold as a safe investment

option World Gold Council has made several
suggestions regarding this matter. These include
allowing banks to offer gold backed investment
products and gold loans to local jewelers.

Gold better than equities

According to the World Gold Council, investing in gold
is considered to be safer than traditional investments
in equities and bonds since gold is the commodity
where the price is determined by various factors
apart from its demand and supply. Also, it is a
commodity that is priced in US Dollars as against our
local currency. The factors that affect the price of
gold are rather different from factors that affect
other assets like say domestic fixed deposits.
Inflation will have no impact on the price of gold,
other factors remaining the same thereby lending
support to your wealth. In fact, in times of inflation,
more money tends to move to gold, thereby driving up
its price.

The last few years show a steep rise in oil prices

resulting in a rise in inflation not only in India but
globally. The impact has been varied across countries
depending on factors such as economic cycle and oil
consumption. This general price rise has added to the
attractiveness of gold.

In other words when the stock market crashes or

when the dollar weakens, gold continues to be a safe
haven investment because gold prices rise in such
circumstances.
Gold is an important and popular investment
for many reasons:

* Gold remains as an integral part of social and

religious customs, besides being the basic form of
saving.

* Gold has aesthetic appeal .Its beauty

recommends it for ornament making above all other
metals.

* Gold is indestructible which does not tarnish and

is also not corroded by acid-except by a mixture
of nitric and hydrochloric acids.

* Gold is a currency that has no borders and does

not need to be honoured by any governmental
obligations.

* Gold has long proven ability to retain value and

appreciate in value.

* Gold is readily available in a standardized form.

STOP USING JUST STOCKS AND FIXED DEPOSITS AS

INVESTMENT TOOLS. USE GOLD TO DIVERSIFY YOUR
PORTFOLIO TO ENSURE HIGHER RETURNS AT EVERY
RISK PROFILE
Gold analyst and CEO of GFMS Metals Consulting, Paul
Walker, estimates that conditions will continue to favor
investment in 2009 and that the net new dollar inflow into
gold will increase substantially over the 2008 level.

BIBLOGRAPHY:

 For internet purpose:

google.com
wikipedia.com

 Thanks giving:
We would like to thanks Mr.Umakant
Joshi, dealer in gold ornaments to
provide us the useful information and
knowledge and also our Prof.Shilpa
Peshwani to guide us.