Gold can protect you from inflation

Apr 2010

Rising prices (also known as "inflation" in financial jargon) has been a big worry, more so since this escalation in prices is unmatched by income growth, making it difficult for the common man to make ends meet. Take a look at the numbers: As reported on Bloomberg, Wholesale Price Inflation rose +9.90% in March while the more concerning Consumer Price Inflation which affects all of us is as high as +16% reported as of January (it is released with a lag).

Food commodity prices are the main reason behind the continuing high inflation figures. An index measuring wholesale prices of lentils, rice, vegetables and other food articles compiled by the commerce ministry rose 17.22% in the week ended April 03 from a year earlier. Tragic but true - food prices in India have stayed above 15% since November.

All of us have witnessed food prices increase over time, making us spend more for the same amount of food grains and other items we consume. Simply put, the rupee that we hold has been able to buy us less quantity over time, indicating a loss of purchasing power.

However, there is one store of value that can protect against this bug of ever increasing prices, viz - Gold.

Historically, gold has been an excellent inflation hedge. Even in recent times of rampant inflation, gold provides evidence of being an ideal inflation hedge, proving to be more effective than holding currencies which tend to loose purchasing power over time.

Here's the evidence...

Even now, gold tends to buy more of food grains than in the past.

An ounce of gold today buys more of Wheat than ever before...

Source: Bloomberg

An ounce of gold today buys more of Rice than ever before...

Source: Bloomberg

(Note: In the above charts, international commodity prices are converted to Indian Rupees using the exchange rate)

Your money buys you less of food grains than it used to do, but that’s not the case with gold, infact it’s just the opposite - today gold buys you more food grains than ever before.

This undoubtedly proves gold to be an excellent inflation hedge.

It doesn’t end here though. The inflationary forces are likely here to stay. The enormous amount of money doled out by central bankers as an effort to stem the crisis will likely be inflationary down the road, and increases in monetary base seem to testify the same. All said and done, it looks like it’s only a matter of time before we see a further run away increase in price levels on a global scale.

In such a scenario, an allocation of 15-20% to gold would be an excellent inflation hedge. In addition to protecting you from the ensuing inflation threat, it would also act as an effective portfolio diversifier, minimizing your losses in case another wave of financial crisis affects your portfolio.

Click here to invest in the Quantum Gold Fund ETF

--------------------------------------------
Disclaimer:

The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.

Investment Objective: Quantum Gold Fund's (QGF) investment objective is to generate returns that are in line with the performance of gold, subject to tracking errors. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities, but may invest in money market instruments to meet liquidity needs. Terms of Issue: QGF is an open-ended Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed.   Entry Load: Nil Exit Load: In case of QGF: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: QGF is the first gold scheme being launched by the AMC. The AMC has no previous experience in managing gold scheme. The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF.  It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to marker risks. Please read the Scheme Information Document / Key Information Memorandum / Statement of Additional Information / Addenda carefully before investing. Scheme Information Documents /Key Information Memorandums/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com