Why Gold Prices are Rising

Reasons for the rise of Gold Prices
1. Weak Dollar - A weak dollar in the wake of the recession has forced people to invest in
    gold which in the long run would fetch more returns. Dollar is likely to weaken further
    leading to a further rise in gold prices.
2. Low saving rate - With banks offering lower interest rates, fixed deposits make little sense.
    It is cheaper to even borrow money to invest in gold.
3. Inflation - Gold has always been a good tool to fight inflation. Rising inflation rate
    appreciates gold prices. With inflation rising to record highs, gold will prove to be a safe bet.
4. Economic crisis - Gold has always given high returns over a long term. As the crisis
    triggered a fall in markets across the globe, many investors wary of investing in stocks or
    bonds, found refuge in gold. Gold is globally accepted and easily convertible into cash.
5. Reduction in Gold supply - Gold mining is decreasing and the demand for gold is increasing.
    Gold supply has decreased by almost 40 per cent as the cost of mining, legal formalities
    and geographical problems have increased which has led to a fall in gold mining.
6. US interest rates - The interest rates affect gold prices. Whenever interest rates fall, gold
    prices rise. Lowering interest rates increases gold prices as gold becomes a better
    investment option.
7. Political concerns, crisis - Whenever there is a crisis, war, terrorist attack etc, investors rush
    to prevent erosion of their investments and gold as a safe haven. After 9/11 terror attacks in
    the United States, the demand for gold had gone up.
8. Festivals - Indians are among the largest consumers of gold. Gold has been used as
    ornaments and gifted during festivals and weddings. So there is a huge demand for gold
    during the festive season.
9. The Indian factor - Gold has always been a popular investment both jewellery and bullion in
    countries like India and China. India is the world's largest consumer of gold. With a
    population of 1.1 billion people, gold has a great future in India. The Indian wedding season
    from December to May adds to the demand in gold. Any festive occasion is India sees a
    spurt in the demand. People even mortgage their properties to buy gold in India.
10. The China factor - Gold is a symbol of prosperity in China. China has also started investing
    more in gold. China has established gold exchanges. The Shanghai Gold Exchange has
    authorised the China Bank, China Industrial & Commercial Bank, China Constructional Bank
    and China Agricultural Bank as the banks for settling gold accounts.
11. Middle East - Oil rich nations in the Middle East are investing more money in gold. Gold
    imports have risen steadily. Many OPEC countries have openly expressed their interest to
    move out of US dollar denominated assets.

Why Invest in Gold
1. High value and liquidity - It can be converted into cash and hence it is a highly liquid asset.
2. Good security - It is easy to get a loan banks since banks accept gold as security.
3. Investment in gold bonds - The other option is to invest in gold bonds or certificates issued
    by commercial banks. These bonds generally carry low interest rates and a lock-in period
    varying from three years to seven years. On maturity, depositors can take the delivery of
    gold or amount equivalent depending on their options.
3. No income tax - Since there is no regular income from investment in gold, the income will
    not be subjected to tax.
4. Stable investment - Gold pricing is not volatile so it remains stable. It is more stable than
    currencies.
5. Gold bars, coins - It is better to have 5-10 per cent of your net assets as gold. You can
    invest in gold bars and coins. You may not get a good price for jewellery because of making
    and processing charges involved in it. Smaller bars are more expensive than large bars but
    are easier to sell. Bars carry a higher price premium than coins.
6. Hallmark - Look for hallmark or BIS sign on gold bars and coins. It is a sign of quality and
    purity. Buy only from a known dealer or bank.

Gold Deposit Scheme
You can deposit a minimum of 200 gm of gold with no upper limit, in exchange for gold bonds carrying a tax-free interest of 3 to 4 per cent depending upon the tenure of the bond ranging from 3 to 7 years. These bonds are free from wealth tax and capital gains tax. The principal can be collected back in gold or cash at the investor's option.

Gold ETFs
There has been a rise in the Gold Exchange Traded Funds (ETFs). ETFs are mutual funds that stock up gold and then issue units for the same value for investors to trade.
ETFs allow normal investors to hold gold electronically in paperless form. According to World Gold Council estimates, ETF demand for gold in the first half of 2009 stood at over 500 tonnes, three times their annual levels five years ago.
Source - Rediff