Despite recent profit-taking in gold, bets are being placed the precious yellow metal’s prices will scale new highs over the medium to long-term on signs the global economic growth is faltering, experts say. Commodity traders say buying gold on price dips may still be a good investment opportunity for UAE residents, especially for those who missed out on the last rally.
Gold hit a record $1,880 (Dh6,905) an ounce on Friday as European stock markets fell, hit by concerns over Eurozone debt levels and fears of a double dip recession. With the ongoing uncertainty over the future of European economies, prices are likely to remain high, and could continue to rise. “The outlook on gold continues to be bullish. The market is currently taking a breather. By the end of the year, gold prices could still top $2,000 an ounce as the buying momentum continues to be strong, mainly in gold coins and gold bars,” Tushar Patni, managing director of Ajanta Jewellery in Abu Dhabi told Gulf News.
Historically speaking, gold prices have more than quadrupled since the turn of the century and the appeal of commodities as a safe haven is undiminished. Not only have the gold investments yielded higher returns compared to other asset classes, but it is relatively easy to buy and sell. With returns on stock markets and property investments looking increasingly uncertain, more and more people are buying gold as a hedge against inflation.
How to invest in gold
There are various ways to invest in gold, but the easiest and the most conventional is buying physical gold coins, gold bars or gold jewellery from a jeweller. Another way is buying World Gold Council coin, issued by jewellers who are part of the World Gold Council network. Then there is the choice of buying bars of gold bullion, an excellent — if expensive — investment which is beyond the means of many common investors.
Gold Exchange Traded Funds (ETFs) are also a hot option in the current climate. Operating like mutual funds, ETFs invest exclusively in gold and are proving an easier and safer way to buy the precious metal. Not only are charges less, but the gold can be accessed electronically. The disadvantage is that the owner never gets to actually see their gold. The next step for an ambitious investor is investing in gold futures via exchange traded contracts through registered brokers. Futures contracts on the Dubai Gold and Commodities Exchange (DGCX) have inbuilt delivery options, and are a good way to make money from the fall, as well as the rise of gold.
“Investing in gold though futures and options also provides high leverage and helps to take advantage of the short-term and medium-term price movement,” explained Pradeep Unni, senior relationship manager at Dubai-based commodities trading firm Richcomm Global Services DMCC. “Futures contracts also give an exclusive opportunity to short sell in order to take advantage of the downtrend in prices.” For trading/investing in gold futures contracts one needs to open an account with a registered broker and submit documents.
A positive aspect of future contracts is that they are highly leveraged. An investor with $2,000 may only be able to get hold of one ounce of gold in a gold fund or ETF, but in a futures contract investment, the same investment may grant the investor 32 ounces of gold through the gold futures on the Dubai Gold and Commodities Exchange. The return on investment, therefore, would be significantly higher.
Not immune to risks
Taking profits in gold is clearly investor-centric. If an investor trades in the short term, it is possible to make $5 or $10 return on an investment, while long-term trades may continue to hold until their target prices are reached and futures contracts on DGCX are so structured that one can roll over one’s position to the next month by paying a small premium. That said, gold is not immune to general panic in other markets and will therefore move in line with general market sentiment.
“Gold is only a safe haven asset, but not necessarily an investment product to hoard over very long time-frame. We have seen very violent corrections in the past that has eroded the confidence of the investors,” explained Unni.