The History of GoldThe bond between human being and gold is more than few millenniums.

Gold was one of the first metals, extracted and used by human civilization. Earlier, it was found in abundance- neat the earths surface. But steadily, the near surface stocks exhausted and effort to extract gold increased, so did its value. Early men also found that it was least reacting metal, suitable for making durable ornaments. It became precious, and as the system of bartering trade gave way to currency trade, gold became the benchmark of currency trade. Most of the currencies were earlier benchmarked against gold. But this benchmarking restricted the power of governments to spend. So they abandoned the gold standard. The US was one of the last countries to abandon its $34 an ounce rate. Why the older generations were obsessed with gold? Gold was historically attached with currency, and also, having heavy gold ornaments was sign of wealth. Also, there were little financial ventures available to common people- land, gold and FDs (FDs were only available to those who had access to banks.) These and others like these would have given gold the status of safe heaven. The present contextToday, we have plenty of options to park our investments- real estate, equities, gold, commodities, real estate trusts, derivatives, FDs, government bonds, company bonds etc. The list is only limited by the space. So, gold is one of them and not one of the few options. Advantages- It provides hedge against inflation and uncertainty. It also provides hedge against exchange rate fluctuations. Disadvantage- it has no utility value. Let me elaborate this. When we invest in a companys share, we become a partial owner in the company. So when company makes profit, as a partial owner, we are entitled to get our share as dividend. Also, as the value of assets increases, the companys valuation increase, causing our share price to increase. But as far as gold is concerned, when we invest in gold, the amount is blocked, it generates no profit. But yes, as the value to asset (gold) increases, our investment value increases. The golden strategy So, gold can not be used as a long term investment. Instead, it should be used as insurance against inflation and poor economic conditions. So, its allocation should not be more than 10-15% of the portfolio value. But I must mention this allocation is of long term. In short term, all of the asset classes do not move in tandem, i.e. equities are fashionable in bull phase, while gold and FDs are favored in bear phase. Its sheer herd mentality. But I will follow my anti-herd approach. I will be biased

towards gold, together with FDs (remember decreasing debt is equivalent to investing in FD, and vice versa, as explained in my last mail) at later stages of any bull run, and will invest heavily in equities during the painful bear phase. Gold- circa 2009 As the governments world over have pumped huge amount of monies to stimulate their economies, fear of inflation is gaining momentum. And remember, gold is hedge against inflation, so gold is rising. But another school of thought says that the global uncertainty is steadily getting over, so gold is in its final rise phase, provided the economies continue their recovery. I am following the later ones. I think gold is one of the most glamorous topics of discussion, and my study guides me that this is trigger to sell and essentially not an entry point. Remember when the Sensex was having its 19k, 20k 21k journeys, front pages of most news papers were flooded with new high news. And investors, some of you too, were discussing about 25k in near future. Golds price rise is not caused by real rise in demand (jewelry demand and central bank demand), but by speculative demand (investment demand- more people are investing in it). The rise in prices has softened the demand in India; in fact selling of jewelry has increased in last 1-1.5 years. Sounds technical! Simply put its rising because people think it will rise. With every rise, weaker hands are buying while strong hands are selling. When these weaker hands will be convinced or will be made to accept that further rise is capped, they will start selling. This will keep the rise limited. However, they will not dump like they did with crude (The crude went from the top of $147 to $34 within a span of few months). Instead, the rate of gold will be less than inflation, so it will be cheaper in real terms. India is largest importer of the yellow metal, but gold prices are governed by international markets. Globally, now a days gold is trading near $1000, and is priced near 16K per 10g. I do not study the international rates in deep, but I do not expect gold to rise above $1200-1300 in 1-2 years. It may go down to $817 and stay there for some time. But if it breaks $800, then it could swiftly plunge to $650 levels. But prices in Indian are also influenced by the rupee-dollar rates. Here, I have more clarity. Presently Rs 47-48 is needed to buy a dollar, and if India and other emerging markets continue their pace of economic recovery, FIIs will pour more dollars. This will appreciate rupee to 42-44 levels, i.e. dollar will be cheap by 10%. So, even if international gold prices remain at current level in dollar terms, Indian gold prices will be softer by 10%. Combining all logics, I think the upper price level is capped at Rs. 18,000 per 10g (Sell band). But gold may not reach this rate. However, the lower rates may be at Rs. 12,000-13000/-(buy band). These bands will be adjusted to neutralize the effects of inflation.

I am not going to buy gold in 2009. I may start investing in gold in 2011-13, depending on how dangerous levels the equities reach. How can we invest in gold? There are plenty of options to choose from- jewelry, coins, through commodity exchanges, gold ETFS and gold mine companies. I will write about them in a separate mail. Jewelry Coins- They are certified by banks. But are usually 10-15% more priced than the market rate. Use them if you are investing for much long term. Local biscuitsGold ETFs- The best option. Like mutual funds, they pool our money and invest in gold. We can purchase these units with our existing demat accounts- say RMoney or ICICI direct. Gold mine companies- Not an option in India.