Friday, July 25, 2008

Inflation, Stocks & Gold

For Investors who have savings, this is a difficult time. Inflation is raging at 12% (11.89% to be exact). With Banks paying 9% on long term deposits, real returns have turned negative. The stock market is in a bear phase, offering little prospects of capital appreciation. One area where investors can put money is commodities. In India, Gold is the only commodity where investments can be made easily, both in physical form and as a security through ETF's (Exchange traded funds). We are not dsicussing property since it requires a different level of investment.
For investments, we then have - Fixed Deposits with banks, Stocks, Gold. Now, just like stocks, Gold is not risk free. In the current scenario, I feel, an investment strategy should include Gold as a method of diversification.
Gold may be setting up for an up move. A reader, Pratik, wrote yesterday, pointing out that the chart for Gold shows a cup and handle pattern in development. He is correct. The cup includes a bullish head and shoulder which has broken out on the upside. Then, based on charts, this is probably a good time to start your investments in Gold. If prices go up, as the charts seem to suggest, you will have a short term capital gain - an event we all wish for. If prices stay stagnant or fall, well, you were going to invest in Gold anyway.
Some part of your investments should be in Fixed Deposits. Some part should be in stocks, while some of your funds should be in cash, ready to invest when the stock market becomes so dull that everyone has forgotten about it.