Most serious investors find gold unexciting because it does not sizzle like stocks. Here is something that could do well and yet not send shivers down your spine - DSP Merrill Lynch World Gold Fund, an open end fund that would invest in gold mining companies through an international fund managed by Merrill.

One of largest in its category with assets of $5.4 billion (Rs 21, 886 crore), the fund has a track record of beating its own benchmark index, the underlying commodity and even the Nifty over its 12 -year history (See Market Beater). Merrill tries to pick the best candidates across various countries. About 80 per cent of the portfolio consists of gold miners such as Barrick Gold and Impala, with a small portion allocated to miners of platinum and silver.

At a time when gold exchange traded funds seem like the hottest thing why go for gold equity? Merrill's marketing pitch is spot on - if you expect cement or copper prices to rise, would you buy the commodities and keep them at home or buy shares of their manufacturers?

Since costs for gold miners remain the same, gold price changes have a multiplier effect on the earnings of these companies. If gold prices rise to $800 or about 23 per cent, profits of gold companies would rise some 150 per cent (see Bullish Scenario). All this will work well if gold prices rise. And here is why gold will become dearer.

One trigger lies in the stock markets itself. The current problems in the US financial markets is only making investors across the globe risk averse. When these investors look for shelter, they would choose assets, which would be a store of value. Gold is one such thing. And the way the world is shaping up, gold seems poised to provide good returns too.

As the US grapples with its huge trade deficit, most economists believe that the dollar would fall (only timing is a question) with two significant implications. One, the central banks around the world with their war chest of international reserves (currently in dollars) would seek more diversification to insulate themselves from the fall in dollar.

In an extreme scenario, the Gold Standard could make a comeback. Only a minuscule portion of the $2.7 trillion of international reserves that emerging markets possess is held in the form of gold currently. China's gold holdings are only 1 per cent of international reserves. So central bank purchases in future could be a big demand driver in the coming years.

The second big driver would be growing riches in the emerging economies. As people in India (already the biggest consumer of gold), and also in China and the Middle East earn more and feel richer they would indulge in gold purchases, again driving up demand. With the supply side being weak – gold mining companies have not met with much success in exploration in the recent years and existing mines are getting depleted – prices are bound to rise with demand.

The third reason is the development of financial products based on gold like ETFs, gold derivative products, gold deposits and certificates among others, which facilitate investors to take a call on gold as an investment.

Supporting this thesis is some statistical evidence from investor Jim Rogers who observes that the shortest commodity cycle in history lasted for 15 years while the longest lasted for 23 years, which means that there is still more way to go before gold prices peak.

There is one risk though. Call it appreciation of the rupee or depreciation of the dollar. Since gold is denominated in dollars, a fall in the dollar would negatively impact rupee returns. But this would be mitigated mostly by the excess return that is possible by taking the equity route.

Betting on gold is like betting on the fall of America and the rise of India and China. And choosing stability as against volatility.

BS