5. final copy of chapters

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Introduction

Gold as an investment

Of all theprecious metals,goldis the most popular as an investment. Investors generally buy

gold as a hedge or harbour against economic, political, or socialfiat currencycrises

(including investment market declines, burgeoning national debt, currency failure, inflation,

war and social unrest). The gold market is subject to speculation as are other markets,

especially through the use offutures contractsandderivatives. The history of thegold

standard, the role ofgold reservesincentral banking, gold's lowcorrelationwith

othercommodityprices, and its pricing in relation tofiat currenciesduring theLate-2000s

financial crisis, suggest that gold behaves more like acurrencythan a commodity.

Gold price

Gold has been used throughout history as money and has been a relative standard for

currency equivalents specific to economic regions or countries, until recent times. Many

European countries implemented gold standards in the latter part of the 19th century until

these were temporarily suspended in the financial crises involving World War I. AfterWorld

War II, the Bretton Woods systempegged the United States dollar to gold at a rate of US$35

pertroy ounce. The system existed until the 1971 Nixon Shock, when the US unilaterally

suspended the direct convertibility of the United States dollar to gold and made the transition

to a fiat currency system. The last currency to be divorced from gold was the Swiss Franc in

2000.
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Since 1919 the most common benchmark for the price of gold has been the London gold

fixing, a twice-daily telephone meeting of representatives from five bullion-trading firms of

the London bullion market. Furthermore, gold is traded continuously throughout the world

based on the intra-day spot price, derived from over-the-countergold-trading markets around

the world (code "XAU"). The following table sets forth the gold price versus various assets

and key statistics: (Table 1)

Year GoldUSD/ozt DJIA USDWorld GDP

USD tn

US

DebtUSD bn

Trade

Weighted

US dollar

Index

1970 37 839 3.3 370

1975 140 852 6.4 533 33.0

1980 590 964 11.8 908 35.7

1985 327 1,547 13.0 1,823 68.2

1990 391 2,634 22.2 3,233 73.2

1995 387 5,117 29.8 4,974 90.3
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2000 273 10,787 31.9 5,662 118.6

2005 513 10,718 45.1 8,170 111.6

2010 1,410 11,578 63.2 14,025 99.9

1970 to 2010 net change, %

3,792 1,280 ... 3,691 ...

1975 (post US off gold standard) to 2010 net change, %

929 1,259 ... 2,531 ...

Factors influencing the gold price

Today, like most commodities, the price of gold is driven by supply and demand as well

as speculation. However unlike most other commodities, saving and disposal plays a larger

role in affecting its price than its consumption. Most of the gold ever mined still exists in

accessible form, such as bullion and mass-produced jewellery, with little value over its fine

weightand is thus potentially able to come back onto the gold market for the right price.

At the end of 2006, it was estimated that all the gold ever mined totalled 158,000 tonnes

(156,000 long tons; 174,000 short tons). This can be represented by a cube with an edge

length of 20.2 metres (66 ft).
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Given the huge quantity of gold stored above-ground compared to the annual production, the

price of gold is mainly affected by changes in sentiment (demand), rather than changes in

annual production (supply). According to the World Gold Council, annual mine production of

gold over the last few years has been close to 2,500 tonnes. About 2,000 tonnes goes into

jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and

exchange traded gold funds.

Central banks

Central banks and the International Monetary Fundplay an important role in the gold price.

At the end of 2004 central banks and official organizations held 19 percent of all above-

ground gold as official gold reserves. The ten years Washington Agreement on Gold (WAG),

which dates from September 1999, limits gold sales by its members (Europe, United States,

Japan, Australia, Bank for International Settlements and the International Monetary Fund) to

less than 500 tonnes a year. European central banks, such as the Bank of England and Swiss

National Bank, were key sellers of gold over this period. In 2009, this agreement was

extended for a further five years, but with a smaller annual sales limit of 400 tonnes.

Although central banks do not generally announce gold purchases in advance, some, such as

Russia, have expressed interest in growing their gold reserves again as of late 2005. In early

2006,China, which only holds 1.3% of its reserves in gold, announced that it was looking for

ways to improve the returns on its official reserves. Some bulls hope that this signals

that China might reposition more of its holdings into gold in line with other Central Banks.

India has recently purchased over 200 tons of gold which has led to a surge in prices.
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It is generally accepted that interest rates are closely related to the price of gold. As interest

rates rise the general tendency is for the gold price, which earns no interest, to fall, and as

rates dip, for gold price to rise. As a result, gold price can be closely correlated to central

banks via the monetary policy decisions made by them related to interest rates. For example

if market signals indicate the possibility of prolonged inflation, central banks may decide to

enact policies such as a hike in interest rates that could affect the price of gold in order to

quell the inflation. An opposite reaction to this general principle can be seen after the

European Central bank raised its interest rate on April 7, 2011 for the first time since 2008.

The price of gold responded with a muted response and then drove higher to hit new highs

one day later. A similar situation happened in India: In August 2011 when the interest rates

were at their highest in two years, the gold prices peaked as well.

Hedge against financial stress

Gold, like all precious metals, may be used as a hedge against inflation, deflation or

currency devaluation. As Joe Foster, portfolio manager of the New York-based Van Eck

International Gold Fund, explained in September 2010:

The currencies of all the major countries, including theirs, are under severe pressure because

of massive governmentdeficits. The more money that is pumped into these economiesthe

printing of money basicallythen the less valuable the currencies become.

If the return on bonds, equities and real estate is not adequately compensating for risk and

inflation then the demand for gold and other alternative investments such as commodities

increases. An example of this is the period ofstagflation that occurred during the 1970s and

which led to an economic bubble forming in precious metals.
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Jewellery and industrial demand

Jewellery consistently accounts for over two-thirds of annual gold demand. India is the

largest consumer in volume terms, accounting for 27% of demand in 2009, followed by

China and the USA.

Industrial, dentistry and medical uses account for around 12% of gold demand. Gold has high

thermal and electrical conductivity properties, along with a high resistance to corrosion and

bacterial colonization. Jewellery and industrial demand has fluctuated over the past few years

due to the steady expansion in emerging markets of middle classes aspiring to Western

lifestyles, offset by the financial crisis of 20072010.

Short selling

The price of gold is also affected by various well-documented mechanisms of artificial price

suppression, arising from fractional reserve banking and naked short selling in gold, and

particularly involving the London Bullion Market Association, the United States Federal

Reserve System, and the banks HSBC and JPMorgan Chase. Gold market observers have

noted for many years that the price of gold tends to fall artificially at the start of New York

trading.
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Investment vehicles:

1. BarsThe most traditional way of investing in gold is by buying bullion gold bars. In some

countries, like Canada, Argentina, Austria, Liechtenstein and Switzerland, these can

easily be bought or sold at the major banks. Alternatively, there are bullion dealers that

provide the same service. Bars are available in various sizes. For example in

Europe, Good Deliverybars are approximately 400 troy ounces (12 kg). 1 kilogram

(32 ozt) are also popular, although many other weights exist, such as the 10oz, 1oz, 10 g,

100 g, 1 kg, 1 Tael, and 1 Tola.

Bars generally carry lower price premiums than gold bullion coins. However larger bars

carry an increased risk of forgery due to their less stringent parameters for appearance.

While bullion coins can be easily weighed and measured against known values, most bars

cannot, and gold buyers often have bars re-assayed. Larger bars also have a greater

volume in which to create a partial forgery using a tungsten-filled cavity, which may not

be revealed by an assay.

One way of avoiding such a scam is to buy and hold gold bars that are held within

the London bullion market (LBMA) chain of custody and store the gold in a LBMA

recognized vault. The gold bullion held within the LBMA recognized vaults can be

bought and sold easily. If it is removed from the vaults and stored outside of the chain of

integrity, for example stored at home or in a private vault, the bar will have to be re-

assayed before it can be returned to the LBMA chain. This process is described under the

LBMA's "Good Delivery Rules".

The LBMA includes in this "traceable chain of custody" refiners as well as vaults. Both

have to meet their strict guidelines. Bullion products from these trusted refiners are traded
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at face value by LBMA members without assay testing. By buying bullion from an

LBMA member dealer and storing it in an LBMA recognized vault, customers avoid the

need of re-assaying or the inconvenience in time and expense it would cost.

Efforts to combat gold bar counterfeiting include kinebars which employ a unique

holographic technology and are manufactured by the Argor-Heraeus refinery in

Switzerland.

2. CoinsGold coins are a common way of owning gold. Bullion coins are priced according to

theirfine weight, plus a small premium based on supply and demand (as opposed

to numismatic gold coins which are priced mainly by supply and demand based on

rarity and condition).

The Krugerrand is the most widely-held gold bullion coin, with 46,000,000 troy

ounces (1,400 tonnes) in circulation. Other common gold bullion coins include

the Australian Gold Nugget (Kangaroo), Austrian Philharmoniker

(Philharmonic), Austrian 100 Corona, Canadian Gold Maple Leaf, Chinese Gold

Panda,Malaysian Kijang Emas, French Napoleon or Louis d'Or, Mexican Gold 50

Peso, British Sovereign, American Gold Eagle, and American Buffalo.

Coins may be purchased from a variety of dealers both large and small. Fake gold

coins are not uncommon, and are usually made of gold-platedlead.
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3. Exchange-traded products (ETPs)Gold exchange-traded products may include ETFs, ETNs, and CEFs which are traded like

shares on the major stock exchanges. The first gold ETF, Gold Bullion Securities (ticker

symbol "GOLD"), was launched in March 2003 on the Australian Stock Exchange, and

originally represented exactly 0.1 troy ounces (3.1 g) of gold. As of November 2010,SPDR

Gold Shares is the second-largest exchange-traded fund (ETF) in the world by market

capitalization.

Gold ETPs represent an easy way to gain exposure to the gold price, without the

inconvenience of storing physical bars. However exchange-traded gold instruments, even

those which hold physical gold for the benefit of the investor, carry risks beyond those

inherent in the precious metal itself. For example the most popular gold ETP (GLD) has been

widely criticized, and even compared with mortgage-backed securities, due to features of its

complex structure.

Typically a small commission is charged for trading in gold ETPs and a small annual storage

fee is charged. The annual expenses of the fund such as storage, insurance, and management

fees are charged by selling a small amount of gold represented by each certificate, so the

amount of gold in each certificate will gradually decline over time.

Exchange-traded funds, or ETFs, are investment companies that are legally classified as

open-end companies orUnit Investment Trusts (UITs), but that differ from traditional open-

end companies and UITs. The main differences are that ETFs do not sell directly to investors

and they issue their shares in what are called "Creation Units" (large blocks such as blocks of

50,000 shares). Also, the Creation Units may not be purchased with cash but a basket of

securities that mirrors the ETF's portfolio. Usually, the Creation Units are split up and re-sold

on a secondary market.
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ETF shares can be sold in basically two ways. The investors can sell the individual shares to

other investors, or they can sell the Creation Units back to the ETF. In addition, ETFs

generally redeem Creation Units by giving investors the securities that comprise the portfolio

instead of cash. Because of the limited redeem ability of ETF shares, ETFs are not considered

to be and may not call themselves mutual funds.

4. CertificatesGold certificates allow gold investors to avoid the risks and costs associated with the transfer

and storage of physical bullion (such as theft, large bid-offer spread, and metallurgical

assay costs) by taking on a different set of risks and costs associated with the certificate itself

(such as commissions, storage fees, and various types ofcredit risk).

Banks may issue gold certificates for gold which is allocated(fully reserved)

orunallocated

(pooled). Unallocated gold certificates are a form offractional reserve

banking and do not guarantee an equal exchange for metal in the event of a run on the issuing

bank's gold on deposit. Allocated gold certificates should be correlated with specific

numbered bars, although it is difficult to determine whether a bank is improperly allocating a

single bar to more than one party.

The first paper bank notes were gold certificates. They were first issued in the 17th century

when they were used by goldsmiths in England and the Netherlands for customers who kept

deposits of gold bullion in their vault for safe-keeping. Two centuries later, the gold

certificates began being issued in the United States when the US Treasury issued such

certificates that could be exchanged for gold. The United States Government first authorized

the use of the gold certificates in 1863. In the early 1930s the US Government restricted the

private gold ownership in the United States and therefore, the gold certificates stopped
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circulating as money (this restriction was reversed on January 1, 1975). Nowadays, gold

certificates are still issued by gold pool programs in Australia and the United States, as well

as by banks in Germany and Switzerland.

5. AccountsMany types of gold "accounts" are available. Different accounts impose varying types of

intermediation between the client and their gold. One of the most important differences

between accounts is whether the gold is held on an allocated (fully reserved) or unallocated

(pooled) basis. Unallocated gold accounts are a form offractional reserve banking and do not

guarantee an equal exchange for metal in the event of a run on the issuer's gold on deposit.

Another major difference is the strength of the account holder's claim on the gold, in the

event that the account administrator faces gold-denominated liabilities (due to

a short ornaked short position in gold for example), asset forfeiture, orbankruptcy.

Many banks offer gold accounts where gold can be instantly bought or sold just like any

foreign currency on a fractional reservebasis. Swiss banks offer similar service on a fully

allocated basis. Pool accounts, such as those offered by Kitco, facilitate highly liquid but

unallocated claims on gold owned by the company. Digital gold currency systems operate

like pool accounts and additionally allow the direct transfer of fungible gold between

members of the service. BullionVault, for example, allows clients to create a bailment on

allocated (non-fungible) gold, which becomes the legal property of the buyer.
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6. Derivatives, CFDs and spread bettingDerivatives, such as gold forwards, futures and options, currently trade on various exchanges

around the world and over-the-counter(OTC) directly in the private market. In the U.S., gold

futures are primarily traded on the New York Commodities Exchange (COMEX)

and Euronext.liffe. In India, gold futures are traded on the National Commodity and

Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX).

The product symbol for gold futures is GC, and it is traded in a standard contract size of 100

troy ounces. CME Globex, CME ClearPort (CME Group) and Open Outcry (New York) are

the primary futures exchange venues through which it is traded. The minimum fluctuation

allowed in price is $0.10 per troy ounce, and it is held to a minimum of 995 fineness quality

specification.

As of 2009 holders of COMEX gold futures have experienced problems taking delivery of

their metal. Along with chronic delivery delays, some investors have received delivery of

bars not matching their contract in serial number and weight. The delays cannot be easily

explained by slow warehouse movements, as the daily reports of these movements show little

activity. Because of these problems, there are concerns that COMEX may not have the gold

inventory to back its existing warehouse receipts.

Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the UK,

provide contract for difference (CFD) orspread bets on the price of gold.

7. Mining companiesThese do not represent gold at all, but rather are shares in gold mining companies. If the gold

price rises, the profits of the gold mining company could be expected to rise and as a result
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the share price may rise. However, there are many factors to take into account and it is not

always the case that a share price will raise when the gold price increases. Mines are

commercial enterprises and subject to problems such as flooding, subsidence and structural

failure, as well as mismanagement, theft and corruption. Such factors can lower the share

prices of mining companies.

The price of gold bullion is volatile, but unhedged gold shares and funds are regarded as even

higher risk and even more volatile. This additional volatility is due to the inherent leverage in

the mining sector. For example, if you own a share in a gold mine where the costs of

production are $300 per ounce and the price of gold is $600, the mine's profit margin will be

$300. A 10% increase in the gold price to $660 per ounce will push that margin up to $360,

which represents a 20% increase in the mine's profitability, and potentially a 20% increase in

the share price. Furthermore, at higher prices, more ounces of gold become economically

viable to mines, enabling companies to add to their reserves. Conversely, share movements

also amplify falls in the gold price. For example, a 10% fall in the gold price to $540 will

decrease that margin to $240, which represents a 20% fall in the mine's profitability, and

potentially a 20% decrease in the share price.

To reduce this volatility some gold mining companies hedge the gold price up to 18 months

in advance. This provides the mining company and investors with less exposure to short term

gold price fluctuations, but reduces returns when the gold price is rising.

Investment strategies
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Fundamental analysis

Investors using fundamental analysis analyze the macroeconomic situation, which includes

international economic indicators, such as GDP growth rates, inflation, interest

rates, productivity and energy prices. They would also analyze the yearly global gold supply

versus demand. Over 2005 the World Gold Council estimated yearly global gold supply to be

3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. While gold

production is unlikely to change in the near future, supply and demand due to private

ownership is highly liquid and subject to rapid changes. This makes gold very different from

almost every other commodity. Identifiable investment demand for gold, which includes gold

exchange-traded funds, bars and coins, was up 64 percent in 2008 over the year before.

Gold versus stocks

In the last century major economic crises (such as the Great Depression, World War II,

the first and second oil crisis) lowered the Dow/gold ratio, an indicator of how bad

a recession is and whether the outlook is deteriorating or improving, to a value well below 4.

The ratio fell on February 18, 2009 to below 8. During these difficult times, many investors

tried to preserve their assets by investing in precious metals, most notably gold and silver.

The performance of gold bullion is often compared to stocks due to their fundamental

differences. Gold is regarded by some as a store of value (without growth) whereas stocks are

regarded as a return on value (i.e., growth from anticipated real price increase plus

dividends). Stocks and bonds perform best in a stable political climate with strong property

rights and little turmoil. The attached graph shows the value of Dow Jones Industrial Average

divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in

comparison to gold in part because of the stability of the American political system. This
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appreciation has been cyclical with long periods of stock outperformance followed by long

periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold

during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the

1980s and 1990s. The gold price peak of 1980 also coincided with the Soviet Union's

invasion of Afghanistan and the threat of the global expansion of communism. The ratio

peaked on January 14, 2000 a value of 41.3 and has fallen sharply since.

On November 30, 2005 Rick Munarriz ofThe Motley Foolposed the question of which

represented a better investment: a share ofGoogle or an ounce of gold. The specific

comparison between these two very different investments seems to have captured the

imagination of many in the investment community and is serving to crystallize the broader

debate. At the time of writing, a share of Google's stock was $405 and an ounce of gold was

one day from breaking the $500 barrier, which it did December 1. On January 4, 2008 23:58

New York Times, it was reported that an ounce of gold outpaced the share price of Google by

30.77%, with gold closing at $859.19 per ounce and a share of Google closing at $657 on

U.S. market exchanges. On January 24, 2008, the gold price broke the $900 mark per ounce

for the first time. The price of gold topped $1,000 an ounce for the first time ever on March

13, 2008 amid recession fears in the United States. Google closed 2008 at $307.65 while gold

closed the year at $866. Leading into 2010, Google had doubled off that (100%), whereas

gold had risen 40%.

The analysis of log-linear oscillations in the gold price dynamics for 20032010 conducted

recently by Askar Akayev's research group has allowed them to forecast a collapse in gold

prices in MayJuly 2011. As of 18 July 2011, this collapse had not yet occurred, with gold

at record prices of over $1600 per ounce.

In his bookBasic Economics, Thomas Sowell argued that, in the long-term, gold does not

hold its value compared to stocks and bonds:
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To take an extreme example, while a dollar invested in bonds in 1801 would be worth

nearly a thousand dollars by 1998, a dollar invested in stocks that same year would be

worth more than half a million dollars. All this is in real terms, taking inflation into

account. Meanwhile, a dollar invested in gold in 1801 would by 1998 be worth just 78

cents.

India as a country has the highest consumption of gold in the world. At the same time an

average returns in Indian stock market for last ten years from 2001 to 2010 if done via

Systematic Investment plan has been 19%, whereas if same amount is invested in

physical gold via Systematic Investment route then it is also at 19% in gold.

Using leverage

Bullish investors may choose to leverage their position by borrowing money against their

existing assets and then purchasing gold on account with the loaned funds. Leverage is also

an integral part of buying gold derivatives and unhedged gold mining company shares

(see gold mining companies). Leverage or derivatives may increase investment gains but also

increases the corresponding risk of capital loss if/when the trend reverses.

Technical analysis

As with stocks, gold investors may base their investment decision partly on, or solely

on, technical analysis. Typically, this involves analyzing chart patterns, moving

averages, market trends and/or the economic cycle in order to speculate on the future price.
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Current income

Gold in any form does not give any current income. The only exception is the dividend

option in the gold ETFs. If held in the physical form, there is only outflow of cash for the

maintenance of lockers.

Capital appreciation

Historically, gold has been the perfect hedge for inflation. This is based on data from the year

1800 AD. But in terms of absolute returns gold has fared rather poorly giving returns at only

0.8% above inflation.

Real estate and shares beat gold squarely on the capital appreciation front. Real estate and

shares have given returns of about 11% over inflation since 1979 (1979 as that was the year

the index called Sensex was formed).

In the short run, however, gold is a very strong bet, compared to shares which are highly

volatile. The idea for gold investment will be to use it at times when the markets are falling

and when the inflation is very high.

A 5 per cent of the overall investment portfolio can be considered for gold investments

(bullion, WGC coins, gold ETFs). Jewellery is not an investment as far as personal finance

goes. It is only an expense for pleasure, symbolising wealth.

Risk


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Gold does not carry much risk at least in India, as we hardly see deflation in the real sense.

Even when the official figures where showing negative inflation (deflation) during the last

year, the actual prices of food items were increasing. This was reflected in the gold prices

too.

The real risk with buying gold is in the opportunity cost of investing in other avenues that can

actually give higher returns.

Liquidity

Gold scores the highest in terms of liquidity, compared to all other investments. At anytime

of the day and any day gold could literally be converted to cash. Banks would give you a

jewellery loan. (Remember though that many banks do not give loans on coins, including

their own).

Gold jewellers would exchange your gold possessions for other gold jewels. But the problem

here is that there is going to be making and wastage charges involved again. Here we lose the

value (to the extent of 10% to 35%) of gold jewels.

An unfortunate social aspect in most families in India related to liquidity is that, gold has

sentiments attached and is the last item to leave the house in case of financial difficulties.

This negates the entire purpose of gold having liquidity.

Tax treatment

Gold suffers capital gains tax as per the IT act. So it is better to ask your jeweller for the bill.

Close to 90% of the gold jewellery traded in India is unbilled. This is a serious problem for

those who look at gold as an investment. Only the branded jewellers would automatically

give you a bill. At other places ask for one.


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We can make use of indexation benefits when calculating the capital gains of gold. So the tax

payable will not be much.

Gold does not have any other tax benefits. (Table 2)


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Why invest in gold?

Historically, gold has been a proven method of preserving value when a national currency

was losing value. If your investments are valued in a depreciating currency, allocating a

portion to gold assets is similar to a financial insurance policy. . In the past year, the climb in

the price of gold above $1900 per ounce is due to many factors, one being that the dollar is

losing value.

Reasons to say NO to gold

Gold doesnt pay income or interest. Gold was in serious bear market from 1980- 2002. Central banks have tons of bullion which they occasionally threaten to sell. If you dont count the last ten years, gold stocks have not done well. Since gold funds have made big moves over seven of the last eight years, they are

now not doing too well.

Your broker probably wont recommend gold funds.

Reasons to say YES to Gold

The dollar is weak and getting weaker due to national economic policieswhich don't appear to have an end.

Gold price appreciation makes up for lost interest, especially in a bull market. The last ten years are a major bull move similar to the 70's when gold moved

from $38 to over $800.


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Central banks in several countries have been increasing their gold holdings aspart of their foreign reserves, instead of selling.

All gold funds are in a long term uptrend with bullion, sliding in 2011 as gold

increased, but ready for an new gold bull market surge in 2012.

The trend of commodity prices to increase is relative to gold price increases. Worldwide gold production is not matching consumption. The price will go up

further with demand.

Most gold consumption is done in India and China and their demand isincreasing with their increase in national wealth.

All gold funds reached all-time highs in 2010 and will soon resume theadvance.

The short position held by hedged gold funds has being methodically reduced. U.S government economic policies over the past decade have systematically

projected the U.S. economy down a road with uncontrollable federal spending

and uncontrollably increasing trade deficits. Both will cause the dollar to lose

in international value and will increase the price of alternative investments,

such as gold.

With the recent devaluation of many international currencies, the U.S. dollarwas the international safe haven of last resort. We are seeing signs of this

ending due to many financial factors, the most important one being a falling

dollar.


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There are over two Trillion dollars ($2,000,000,000,000) of U.S. debt ownedby foreigners which could be repatriated under certain conditions. This could

cause a major decline in the value of the dollar and a soaring gold price.

If you believe in 'buy low, sell high', gold is still low, but climbing.Why invest in funds?

The 20 funds evaluated by EagleWing Research can be bought, sold, or exchanged on any

market day, do not have a storage or liquidity problem and will quickly send you a fund

prospectus upon request. Each is easy to get into and to get out of.

In general, gold funds:

1. Provide professional management and diversification within the gold sector.2. Are more volatile than the S&P index.3. May or may not have any correlation with the general market.4. Move daily with the price of gold, but not always.5. Move proportionally more than gold, up and down.


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WHAT KIND OF "asset class" includes gold?

Dubbed the No.1 "diversifier" by serious analysts and wealth managers alike, gold clearly

stands outside the three asset classes held by most private investors.

Bonds: Gold pays you no interest, not unless you lend it in return for a yield (ratherthan lend it in ignorance via an "unallocated" gold account). Nor does gold promise to

repay your original capital at some point in time. There is no maturity date. But then,

since gold is no one's debt to repay, the threat of default is zero.

Stocks: Gold has nothing in common with equities either. It employs no staff, noboard of directors, and gives no quarterly earnings report. It doesn't make anything or

provide a service beyond being yellow, shiny and rare.

Real Estate: Nor is gold anything like commercial or residential property. Even ifyou did rent it out, you still couldn't extend it or add a marble-topped plinth in the

kitchen. Gold requires no upkeep (it's virtually indestructible), and there's no income-

tax to pay, because there's no income to tax.

No wonderGold Bullion Investment fell out of favour during the property, bond and

securities boom that got started as the runaway inflation of the 1970s started to fade.

Gold didn't offer a dividend, yield or interest payment (it still doesn't). So as the soaring cost

of living began to slowdown, investments offering to pay a regular income became more

attractive. Those investments like gold that pay you nothing just weren't wanted. Nor could
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gold buy you anything either! This dumb lump of metal lost all official links to the value of

money when Richard Nixon finally killed the Bretton Woods agreement in 1971. Refusing to

exchange Dollars for gold, Nixon made Buying Gold a pure speculationrather than a way

of holding cash.

More than that, gold actually costs you money to store and insure. A real sucker's trade,

therefore, gold sank once the panic of the late '70s inflation slipped into memory and

everything else shot higher. (Diagram 1)

But now gold has turned higher again. While trying to figure out why, you might also like to

know just what kind of an asset class you're getting into if you Buy Gold today.

Cut free from the world's monetary system, gold's not listed as a currency by Bloomberg or

Reuters. Instead, gold has come to be classed as a commodity"an article of commerce or a

product that can be used for commerce" according to the National Futures Association.

Does it make sense to lump gold along with cocoa, orange juice, lean hogs and zinc? "The

simplest definition of commodities is that they are raw materials," notes Katharine
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Pulvermacher in a 2005 paper for the World Gold Counciland raw materials, by definition,

are used to make other products: Wheat into bread; copper into electrical wiring; crude oil

into gasoline; hogs into bacon...gold into...?

Invest gold into what? The quick answer is jewellery. The wrong answer is microchips. An

ever-more common confusion is that gold bought today will make you a capital gain

tomorrow. (After all, gold has risen nearly 25% inside three months!)

Another popular myth is that gold makes a cheerful partner for base-metal and oil traders,

happily rising and falling in line with the price of crude, copper and zinc. The great bull

market of the late '70s certainly mirrored surging prices for energy inputs. But just because

dolphins swim, that doesn't mean they're pilchardsand the parallels between Gold

Prices and the broader commodity markets is by no means perfect.

In the twenty years to 2006, weekly price movements in gold showed a correlation of only

0.1 with the weekly move in commodity prices according to data from the Swiss National

Bank (SNB). It would be nearer 1.0 if gold and commodities moved together.

What's more, the correlation has "varied heavily within the period," notes the SNB, "and

despite similarities in [broad] price movements, the gold market has a number of distinct

features."

Not least amongst gold's distinct features is the fact that it's (virtually) indestructible. That

means there now exists an enormous supply of gold outstanding above ground and this

makes gold as unlike crude oil as you can get.
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Gold does not get burnt up once it's been mined and refined. Instead, it just sits therenot

doing anything, but not vanishing either. That makes it very different from oil.

All told, says the educated guess-work by GFMS Ltd., the widely-respected London

consultancy, there were some 158,000 tonnes of gold sitting above-ground by the end of

2006. (Diagram 2)

Only 12% was being used in industry. Meaning that just one ounce in eight had found its way

into people's teeth, home-pregnancy testing kits, and mobile cell phones.

Yes, the proportion of new gold going into electronics and other industrial end-uses is rising;

it will account for 19% of all the extra gold mined and supplied to the world market in 2007

say the analysts at Virtual Metals in London. That figure has risen from 14.5% in 2002.


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But the vast bulk of the world's gold is still not "consumed" by industry, even if new uses in

nanotechnology and cancer treatments are regularly announced by the gold mining industry's

marketing and lobby group, the World Gold Council. This sets it apart from both silver and

the platinum-group metals, all of which are as heavily used by industryif not more so

than they are by jewellery and investment buyers.

This relative lack of industrial value also separates the demand for gold almost entirely from

the flux of economic growth. Price patterns come and go, but a 27-year study in 2003

covering both the bull market of the 1970s and the long slump that followedfound that:

Gold showed "no statistically significant correlation" with changes in big-pictureeconomic trends such as Gross Domestic Product (GDP), inflation or interest rates;

US stocks and bonds, in contrast, were linked to changes in the economy; Other commodities"such as aluminium, oil and zinc"also showed a much

stronger correlation with economic changes than did gold;

These other commodities also showed a greater connection than gold to the returnsearned from stocks and bonds.

"These results support the notion that gold may be an effective portfolio diversifier,"

concluded the study's author, Colin Lawrence, visiting professor at Cass Business School in

London. He noted "the lack of correlation between returns on gold and those on financial

assets such as equities."

Yet Lawrence still called gold a "commodity", a word that most people take to mean in its

everyday sensesomething consumed as an industrial input or used as a raw product in our


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homes. The vast bulk of the world's gold, in contrast, does not have this kind of economic

purpose. It now exists in gold jewellery, central-bank vaults, and private investment

portfolios instead.

Add them together, and these physical gold hoarderscentral banks, private investors and

jewellery ownershold 86% of all the gold ever mined between them. Whatever "use" they

believe they're making of gold, it's clear that their consumption does not destroy the metal.

While the long-term historical and traditional gold-buying motives of central bankers and

jewellery owners deserves its own study, the Gold Market is clearly moving higher on a wave

of investment demand right now.

"There is so much uncertainty around and if youre looking for a basic store of value what

else do you choose?" asks Peter Hambro, head of the eponymous gold-mining company listed

on the London Stock Exchange but hard-at-work in Russia.

"All currencies seem to be in a degree of flux. It is about how much currencies will devalue

against gold. The Dollar will probably fall furtherso gold could reach the record high levels

of the 1970s of $850 an ounce."

Hambro's reference to currencies is telling. RBC Capital Markets trade the metal on their

currency, rather than commodity desks. "The right way to trade gold is as a foreign currency,

not as a commodity," agreed Steven Mathews, commodities strategist at Tudor Investment

Corp. in a 2003 study for the London Bullion Market Association'sAlchemistmagazine.
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Mathews compiled data showing "days of supply" for each of the most heavily traded

commodities. Stockpiles of soybean meal, for instance, stood ready to meet 2.5 days of

demand on average.

Natural gas inventories held on average 37.5 days of supply. Silverused in batteries,

soldering, catalysts, photography and electrical switches, as well as jewelleryhad 105 days

of supply backed up. Coffee had 216 days...

And gold stood ready to meet more than 7,019 days-worth of demand. The nearest ready-at-

hand stockpile was for platinum at around 15 months. But that pales next to gold's 19 years of

supply.

"Its fair to say that nothing else even comes close," Mathews concluded, "[so] I dont

classify gold as a commodity at all. Obsessively following mine production and demand are

valuable only as a way of anticipating actions of other traders. Gold [instead] trades as a form

of foreign exchange."

If gold does belong to the currency asset class, then the "stateless currency" is clearly beating

all the rest in the first decade of the 21st century, outpacing Euros, Rupees, Chinese Yuan and

Sterling. It touched a new all-time high vs. British Pounds on Friday 2 Nov., even as Sterling

made a new quarter-century high vs. the US Dollar.

But goldunlike the rest of the world's tradable currenciescannot raise or cut its interest

rates to attract or dissuade currency speculators. Gold pays no interest whatsoever, remember.

And while that might mean it has something in common with the Japanese Yen, it has nearly

tripled against that currency so far in this bull market. It has also outperformed the three key


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asset classes that still sit in most people's investment portfolios and "the investment motive

is a much more important driver in the gold market than in the market for other

commodities," as Philipp Hildebrand, vice-chairman of the Swiss National Bank pointed out

in a 2006 speech.

Given that gold doesn't pay you anything in yield, interest or dividendsand that it does not

have any real industrial valuethe "investment motive" for gold can only be explained as

desire to quit other assets. Or at least, to hold an asset entirely free from what drives other

asset markets up and down.

That's what happened during the 1970s.(Diagram 3)

During the last great bull market in gold, between 1970 and 1980, a portfolio spread evenly

across US stocks and bonds would have lost 1.6% per year on average. Gold's annual gains,

meantime, averaged 19.9%.

In real termsallowing for inflationthe S&P 500 index actually dropped an average of

4.2% year-on-year. Gold Prices, on the other hand, out-stripped the soaring cost of living by

more than 29% per year.
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For bond investors, the real yield offered by US Treasuries collapsed during the 1970s. On

the 10-year note, real yields averaged less than 0.4% above inflation. Indeed, they slipped

below zerosignalling a loss of purchasing powerfor two years starting in Sept. 1973, and

again from Sept. 1978. Gold, meantime, rose 15 times over.

But "the price for this 'insurance function'," as Philipp Hildebrand of the Swiss National Bank

went on in that 2006 speech, "is reflected in the fact that gold is less profitable in the long

term than other financial assets."

Gold certainly lost out to other financial assets during the 1980s and '90s. As bond yields rose

above falling inflation, the S&P soared 12 times over. Gold Prices, in contrast, dropped 3%

of their Dollar value every year for two decades on average. Between 1994 and 2000 alone,

gold dropped by one-quarter. An equal mix of US equities and bonds, on the other hand,

would have given you 10.7% returns annually on average.

Over the last seven years, however, the "insurance function" of gold has paid off handsomely

and for the second half of this period, insurance wasn't even needed! Between New Year's

Eve 1999 and the start of 2003, the S&P averaged a loss of 15% per year. Gold rose by more

than 7.9% year-on-year.

Since then, the S&P has risen by more than two-thirds. Yet gold has also continued to rise,

gaining 125% in the last four year even after the Tech-Stock Crash was finished.

Has gold's "insurance function" been cancelled? Just what are private investors buying

Gold for today if they don't need protection from falling equities and crumbling bonds?
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Well, perhaps the gold market says investors are looking for protection against falling bond,

real estate and equity valuesas well as a falling US Dollar and slumping US economy. So

they are buying protection ahead of time. And to do that, they're Buying Golda wholly

different asset from everything else.

Which gold fund?

When selecting a fund, an investor should be aware of significant differences between funds:

Investment style................Very conservative or daring. Type of load.....................Front-end, Back-end or No-load. Expense ratios..................Varies from .4% to over 2% Portfolio turnover..............Varies from 2% to over 500% Fund sizes.........................Varies from $80 mil to over $5 billion.

Net Asset Value (NAV).....Varies from $8 to over $90.
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LITERATURE RIVIEW

Adrian Ash (2011) in his article- Gold price 2012: 3 real riskshas talked about the possible

movements in gold prices in 2012. According to his study, 2011 has shown an all time high

gold prices due to many reasons. He has mentioned that gold market has never shown a

continuous bullish movement. It always changes its direction. For the movements in 2012,

there are three reasons that are being highlighted and they are:

Firstly, the crisis that emerged from Europe during second half of 2011 which affected the

US gold market too. It is obvious that there will be an expected fall in 2012 in spite of a

demand for physical gold.

Secondly, china the worlds second largest developing nation will show a positive connection

with the economic growth. Tight credit and stalling income are not expected to be good for

gold.

Thirdly, the volatility in gold prices is one reason for the risks.


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Jeff Clarke (2009) has mentioned in his study- When gold will reach a new high, about the

various price trends of gold. He specified that stall in price has happened before, but since

2001 its always eventually powered to a new high. He has spoken about the investors

expectations on when the price of gold will reach a new mark. It makes sense that big

corrections would take longer to reach new highs than small ones. His study says that gold

has set a record on September 5 at $1,895 an ounce (London PM Fix) and to date has fallen

as low as $1,531 (December 29), a decline of 19.2%.

He has questioned that when do we reach a new high in the gold price?

On one hand, gold could drop below the $1,531 low if the need for cash and liquidity forces

large investors to resume selling. On the other hand, Europe and/or the US could resume

money printing on a large scale and send gold soaring overnight.

Regardless of the date he said that a new high in the gold price will come at some point,

because many major currencies are unsound and overburdened with debtand theyre all fiat

and subject to government tinkering and mismanagement.


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Dave Brown (2011) in his article- Ten junior gold companies for 2012 says about a lower

market capitalization than major gold producers which is often discounted by the market due

to additional risk premiums. The share price can be leveraged to gold price increases, an

initial discovery, or the significant achievement of commercial production.

Stocks are competing with the gold prices. Earlier the same scenario was there when it had to

cope up with the prices of oil.

He has studied different companies trading in gold and some of them are Atac Resources Ltd

(TSXV:ATC) for the Rackla Gold project, Continental Gold Ltd (TSX:CNL), Chesapeake

Gold Corps (TSXV:CKG), Guyana Goldfields Inc (TSX:GUY), Rainy River Resources

Ltd s (TSX:RR) etc. According to him, these are the companies which have announced the

most prestigious projects for the target year 2012.
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Rossie Murray (2007) in her article- Gold, is it really a safe heaven, mentioned about the

advantage of gold being seen a safe investment when all others look bad to investors. It is

limited and unlike shares in a company that can go bust, a precious metal is a tangible, own

able thing.

According to her, gold can be compared with buying a foreign currency. Gold, which is

traditionally priced in dollars, is still weighed by a medieval measure called the Troy ounce.

The rise isn't being driven by a higher demand for jewellery or the use of the metal in

industrial processes. Instead, gold is being bought by investors, and by funds which are then

bought by investors.

When the big institutional investors pull out, the retail investors suffer. Though it has risen up

but there is a lot of risks involved.

Demand in countries such as China and India for industrial uses and jewellery will also

remain an important determinant of gold prices.

Moreover, she wrote gold does not provide any income, interest or dividends, there is only

capital growth, and chances are there an investor can end up losing money. Because gold is

priced in dollars, investors who buy it in the UK can fall victim to currency fluctuations.

She identified that the problem with ETFs is that while they make buying gold comparatively

easy, they make liquidating the investment easy as well; prompting a far more violent

downturn than would otherwise be the case should trader sentiment reverse.


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Adarsh Kazi (2011) in his contribution- All that shines is gold; talked about the present

markets across the globes that are witnessing a bullish trend. According to him, investors

have started to look out for alternate investment horizons as they believe that investing in

equities may have become a bit riskier. He considers that a better strategy to invest around 5

10 per cent of funds in gold will be better. The best form to hold gold is probably gold bars.

There are no making charges involved and as the purity and quantity is assured. Another

good option is to buy gold coins which are available at all leading banks and with renowned

gold. A dematerialisation account is needed for all these activities. He says that gold should

be bought from the jewellers and retailers. Or a credible bank will help an investor get

certified gold. To conclude he says that the prices may now be on the rise, it is still not too

late to consider gold as an investment option.


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Dave Kansas (2012) in his article- gold is still a lousy investment; says that gold is volatile

and a fickle investment. Investors have given lot of interest to it and now it has the former,

brightly tumultuous investment environment. Gold has had a terrific run. Prices have

essentially doubled though the surge in gold prices masks some underlying realities.

His study says that gold prices eventually reached about $850 an ounce. Oil prices were

racing toward $100 a barrel and the stagflation days of the 1970s came up. Gold skidded

from $800 an ounce over the next few years. Gold investing was then not given much

importance. A mixture of fundamentals and fantasy drives the gold prices. But

fundamentals don't support the soaring gold picture, which brings us to the fantasy which

is the main driver of gold today.

He also says that the interest in gold does stem from some fundamental issues, namely

inflation and concerns about the dollar. Moreover the article says that the investors would be

better served investing in Treasury inflation-protected securities, or TIPS. As for real

pressure on the dollar, a more prudent strategy would be to invest in companies based

overseas through an international or emerging-markets mutual fund or exchange-traded

fund.


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Emma Simon (2012) in her article- Will gold delivers another glittering year in 2012;

mentions about the reports from the World Gold Council. Gold is traditionally priced in

dollars and is still weighted by a medieval measure called the troy ounce. He questions that

how long this gravity-defying rise in prices can continue. Moreover it is not clear that the

ones who hold it shall go for more investments or not. On the one hand, he says about the

fundamentals that have helped drive gold prices to such dizzy heights. She says about the

debt problems in Europe have not been resolved; the threat of a double dip recession in

Western economies still looms and demands for gold remains strong from emerging

economies, particularly China and India. Gold prices should continue to climb next year at a

slower rate.

According to her, gold is and will be an attractive investment and there is evidence of

investors increasing their portfolio exposure to gold-related assets. There are no asset class

that has raised so much in value. The investments always do not keep going up indefinitely,

and, when the price of gold does fall, it could be far and fast. Gold hasn't always proven itself

to be a secure asset and its value has suffered from high levels of volatility. Moreover she

says that the volatility itself is causing nervousness at present, with gold prices swinging

dramatically in recent months. Gold is attractive but it is too volatile to be considered safe.

There are risks involved in investing in gold. Gold doesn't pay any divided income either but,

given that interest rates are so low, investors may feel this is less of a sacrifice in the current

environment. Many point out that the real benefit of gold is as a diversification. It is still to

consider gold in a diversified portfolio despite its increasingly unpredictable path. She has

asked the investors to stay clear completely.


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INDUSTRY PROFILE

Today's gold market is a round-the-world, round-the-clock business, played out largely on

dealers' trading screens. The core of the business, however, remains in the key markets

ofLondon, as the great clearing house,New Yorkas the home offutures' trading,Zurichas a

physical turntable,Istanbul,Dubai,SingaporeandHong Kongas doorways to important

consuming regions andTokyowhere the Commodity Exchange (TOCOM) sets the mood of

Japan. EvenParisstill has a small market, a reminder of the days when the French were great

hoarders, while Bombay (Mumbai) has increasing importance underIndia'sliberalised gold

regime that permits official imports through local markets.

These regional markets reflect the growing pattern of liberalisation of the gold trade since the

early 1990's. Until then, many countries either forbade the direct import of gold, or imposed

high import duties, so that smuggling was substantial to countries such as Turkey or India.

Today, however, relaxation has meant that local markets and exchanges can flourish

legitimately.

Consequently the pattern of gold flows from mine to end-user, whether in jewellery, industry

or investment, is more direct. This pattern has also been influenced by growing gold

production, particularly in Australia and the United States, which are now major sources of

supply for Asian markets.

While physical gold movements have changed, the huge expansion of futures

andoptionstrading has also given a quite new dimension to the gold market since the 1980's.
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This section ofGold Avenues encyclopaedia provides detailed briefings on the main

markets, together with explanations of futures and options trading, cross-referenced to our

detailed glossary of the terminology. The special situation ofofficial gold stocksheld

bycentral banksand the role of leading central banks and monetary institutions is also

covered with individual entries on such key players as theBank of England, theSwiss

National Bankand theBank for International Settlements. OurMarkets Libraryalso

recommends books on the gold trade and the role of gold.
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