Investing in gold may also come with risks

While returns over last 10 years have been at 18% CAGR, possibility of generating the same returns has been greatly reduced

Since the last 10 years, gold has been hitting new levels. The pace accelerated after S&P downgraded the US a few days ago from AAA to AA+. This is still good, but then we are talking about the US and the almighty dollar. The consequences of this unprecedented move is not yet clear in the long term, but the short-term impact seems to bring enough indication about the bad consequences in the long run. The rise and rise of gold The downgrades by S&P, which makes investment in the US treasury more risky, inflation in India, general slowdown and the weakening dollar have made gold prices soar. Slow recovery in the US is also adding to the rise of gold prices, because the dollar is not finding favour with investors. This has resulted in the weakening of dollar and has impacted the choice of dollar as reserve currency. Gold seems to be a better alternative and hence people and nations are buying up gold to preserve their capital and earn a decent return. We have seen how China and India bought a good amount of gold a few months ago to hedge against the weakening dollar. The US bond yields have come down too, which has helped gold scale new heights. Added to this is global uncertainty, where investors are not sure about returns from other assets. Gold offers a better value and a good means to protect investment. What should you do? The question is should you go for gold at the price closer to `26,000. To answer this, you have to look at the alternatives available to you. Equities are risky at this point because of uncertainty over how the global situation pans out. Moreover, foreign institutional investors (FIIs) continue to pull money out of Indian market at a short notice. This creates a highly volatile market and retail investors will only help themselves by avoiding the market in the short term. The long-term view is a different story though and today, we do not have enough indicators to say anything convincing about the long term. The real estate industry in India is also facing uncertainty because of slowdown, confusion about acquisition laws, and environmental concerns. Most of the companies are finding it hard to make money. Hence, this option is also not a viable one. Inflation is still high despite the Reserve Bank of India raising of policy rates for the 11th time since March 2010. In such a scenario, the real returns from banks and bonds are close to zero or negative. Hence, keeping idle money in bank is also not a good option. Will the prices rise further? The festival seasons are closer and hence the consumption of gold will increase. This will raise the prices further. The uncertainty over economy and market doesn't show any sign to reduce and hence investors will continue seeking a safer asset for investment. Gold offers safety of investment as well as returns. Moreover, experts (such as JP Morgan, analyst John Bridges) have been predicting gold prices to rise 10%-20% from the current level by the end of this year. What about gold loan Though the prices are skyrocketing, the basic premise of going for gold loan remains the same. First, if you need money immediately and you have no other way to arrange for it. Second, if you think you can pay the loan and get your pledged gold back, only then you should go for it. Any default will incur higher interest rate. Do not go for it just because you anticipate gold prices to go up and hence it will be easier for you to pay the loan later. If prices correct, the lender might ask you to put more money to fill the gap. Finally While you should invest some part of your investment in gold, be aware of the risk associated with it. Gold is certainly a great investment to preserve your capital and earn good returns. The returns over the last 10 years have been truly outstanding at 18% compound annual growth rate. However, this is also a matter of concern as the possibility of earning the same returns now has been greatly reduced. At the same time, gold doesn't pay dividends or bonuses. The only way to earn returns is by the rise in the prices.