It is a unique asset class, which
combines steady returns with high liquidity and an unmatched emotional
satisfaction for the buyer. Find out how you can also benefit from investing in
gold.
Indians love gold. More than 18,000 tonnes of the metal
is lying in Indian households. This is enough to supply Americans with all the
gold they want for the next 100 years. That’s the theory. In reality, very few
Indians would want to sell the gold they own. Nearly 83% of the respondents in
an online survey conducted by economictimes.com last week said that despite the high prices,
they were not considering selling their gold holdings. In fact, 85% wanted to
buy more gold this year, and 28% of these were determined to do so irrespective
of the price of the metal.
What explains this unfettered love for gold? For one, it is a unique asset class that combines steady returns, liquidity and an emotional satisfaction for the buyer. It is also the best way to flaunt one’s wealth. The quantum of gold owned by a household is seen by many as a reflection of its status in society. The metal also has a strong religious link, which will be in full display on Akshaya Tritiya, the auspicious day that is supposed to herald prosperity and good fortune. Legend has it that any investment made on this holy day will never diminish in value. Well, gold is seen as one asset that can never go down. Short-term hiccups notwithstanding, it has been the best performing asset class in the past five years, delivering annualised returns of 23.5% since March 2007. Will the gold rally continue? Most factors point to a sustained rise in gold prices. See the coloured write up below.
What explains this unfettered love for gold? For one, it is a unique asset class that combines steady returns, liquidity and an emotional satisfaction for the buyer. It is also the best way to flaunt one’s wealth. The quantum of gold owned by a household is seen by many as a reflection of its status in society. The metal also has a strong religious link, which will be in full display on Akshaya Tritiya, the auspicious day that is supposed to herald prosperity and good fortune. Legend has it that any investment made on this holy day will never diminish in value. Well, gold is seen as one asset that can never go down. Short-term hiccups notwithstanding, it has been the best performing asset class in the past five years, delivering annualised returns of 23.5% since March 2007. Will the gold rally continue? Most factors point to a sustained rise in gold prices. See the coloured write up below.
A major chunk
of gold owned by Indians is in the physical form. However, paper gold is fast
becoming popular and almost 35% of the gold demand is for this more convenient,
cost-effective and tax-efficient alternative. Sure, gold in its physical form
has a certain allure, but paper gold offers several advantages to the investor
(see box).
Why you
must invest in gold
Gold has for long been considered a hedge against inflation. While it may not have always beaten inflation, in the past few years, the inflation adjusted returns from gold have been spectacular. However, even equities can offer similar returns. What makes gold a must-have in the portfolio is its status as a safe haven during uncertainty. It is a safer bet when there is lack of faith in the global monetary system. Jayant Pai, vice-president, Parag Parikh Financial Advisory Services, says, “Gold is an efficient store of value during uncertainty.” This is because the value of gold cannot be manipulated by the monetary policies of a nation or a government. It is a medium of exchange that has absolutely no default risk, unlike the dollar or any other currency. In today’s unsettled currency markets, gold provides the only reliable alternative for ensuring protection of value. For many investors, gold has now become a
sanctuary from the risk of sovereign defaults, political turmoil and other unforeseen events.
Secondly, gold has little correlation with other asset classes, such as equities and debt, which helps diversify the portfolio. Jayant Manglik, president, retail distribution, Religare Broking, agrees. “Gold adds an element of diversification to the portfolio,” he says. Gold has outperformed most others in recent times. Gold ETFs have given an average return of more than 23% in the past five years, while the stock market has delivered a mere 5.73%. Over the past year, gold has yielded 33% against a 10% decline in the equity market. No wonder then that gold ETFs sell like hot cakes and have amassed thousands of crores in assets. In the nine months between March and December 2011, the assets under management of gold ETFs shot up from 3,765 crore to 9,202 crore—a rise of 144%.
Gold has for long been considered a hedge against inflation. While it may not have always beaten inflation, in the past few years, the inflation adjusted returns from gold have been spectacular. However, even equities can offer similar returns. What makes gold a must-have in the portfolio is its status as a safe haven during uncertainty. It is a safer bet when there is lack of faith in the global monetary system. Jayant Pai, vice-president, Parag Parikh Financial Advisory Services, says, “Gold is an efficient store of value during uncertainty.” This is because the value of gold cannot be manipulated by the monetary policies of a nation or a government. It is a medium of exchange that has absolutely no default risk, unlike the dollar or any other currency. In today’s unsettled currency markets, gold provides the only reliable alternative for ensuring protection of value. For many investors, gold has now become a
sanctuary from the risk of sovereign defaults, political turmoil and other unforeseen events.
Secondly, gold has little correlation with other asset classes, such as equities and debt, which helps diversify the portfolio. Jayant Manglik, president, retail distribution, Religare Broking, agrees. “Gold adds an element of diversification to the portfolio,” he says. Gold has outperformed most others in recent times. Gold ETFs have given an average return of more than 23% in the past five years, while the stock market has delivered a mere 5.73%. Over the past year, gold has yielded 33% against a 10% decline in the equity market. No wonder then that gold ETFs sell like hot cakes and have amassed thousands of crores in assets. In the nine months between March and December 2011, the assets under management of gold ETFs shot up from 3,765 crore to 9,202 crore—a rise of 144%.
How
much gold to hold?
Gold lends stability to the overall portfolio when other assets are not doing well. Having said that, it must be added that gold should not account for a large chunk of your total investment portfolio. Financial experts advise not to allocate more than 10-15% of the portfolio to the yellow metal. While the benefits of diversification may be genuine, there is also a risk associated with gold. One cannot expect gold to continue delivering stellar returns year after year. Like any other asset, gold prices too can fluctuate sharply.
Gold lends stability to the overall portfolio when other assets are not doing well. Having said that, it must be added that gold should not account for a large chunk of your total investment portfolio. Financial experts advise not to allocate more than 10-15% of the portfolio to the yellow metal. While the benefits of diversification may be genuine, there is also a risk associated with gold. One cannot expect gold to continue delivering stellar returns year after year. Like any other asset, gold prices too can fluctuate sharply.
The relentless
rise in gold prices of late is only one side of the gold story, fuelled by
negative real interest rates in the US as well as global uncertainties. In the
past, gold prices have also seen a sustained decline over a period of several
years. Gold prices had tanked in dollar terms from $850 per ounce in 1981 to
$250 per ounce in 2001—a sustained drop in value over a period of 20 years.
However, sitting here in India, you would not have realised this as the
depreciation in the rupee against the dollar during this period made sure that
domestic gold prices actually rose higher in rupee terms.
Why
paper gold makes more sense
As mentioned earlier, gold jewellery, bars and coins will continue to be on people’s wishlist. Gold jewellery offers unique benefits to the buyer. He gets the emotional satisfaction of using the product even as the value of jewellery appreciates. Bars and coins also have their own charm, or snob appeal, if you will. However, buying physical gold entails high making charges. This can be as little as 100-200 per gram for basic bangles and chains. But if you go in for exotic designs that require intricate workmanship, be prepared to shell out up to 600-800 per gram. This pushes up the price of the jewellery. A 20-gram ornament of 22 carat purity might be priced at 60,000 even though the gold value would be only 50,000. Incidentally, the jeweller won’t pay you for the making charges when you go to sell the item. Not just that, he may actually deduct another 5-10% from the gold value if the ornament was purchased from some other jeweller.
As mentioned earlier, gold jewellery, bars and coins will continue to be on people’s wishlist. Gold jewellery offers unique benefits to the buyer. He gets the emotional satisfaction of using the product even as the value of jewellery appreciates. Bars and coins also have their own charm, or snob appeal, if you will. However, buying physical gold entails high making charges. This can be as little as 100-200 per gram for basic bangles and chains. But if you go in for exotic designs that require intricate workmanship, be prepared to shell out up to 600-800 per gram. This pushes up the price of the jewellery. A 20-gram ornament of 22 carat purity might be priced at 60,000 even though the gold value would be only 50,000. Incidentally, the jeweller won’t pay you for the making charges when you go to sell the item. Not just that, he may actually deduct another 5-10% from the gold value if the ornament was purchased from some other jeweller.
Turning
paper gold into jewellery
If you want to buy physical gold, you can take the paper gold route and then convert it into physical gold. E-gold offers the best option. The investor can convert his e-gold units into bars or coins of 99.5% purity. The delivery needs to be in multiples of 8 g, 10 g, 100 g or 1 kg. However, this facility is available only in Mumbai, Delhi and Ahmedabad, and delivery must be taken within 15 days of the request. The entire process involves some costs—making and packaging charges, delivery charges, VAT and other dues.
Gold ETFs also offer the buyer the option to convert them into physical metal, but this can be done only in multiples of 1 kg, though Motilal Oswal AMC offers physical delivery of gold in multiples of 10 g. Here, too, there is an additional delivery charge, which includes transportation, insurance, storage, delivery, administration, signature verification, document verification, etc. The facility is restricted to Mumbai, Ahmedabad, Bangalore and Hyderabad as of now.
If you invest in gold futures, you can convert your position into physical gold. Commodity exchanges offer several smallsized contracts, with the most important among them being Gold Mini (100 g) and Gold Guinea (8 g). Here, again, the buyer has to pay the making charges ( 200 per Gold Guinea) and other statutory levies. Since these are national exchanges, you will be able to take delivery of the physical gold in major cities, including Mumbai, Ahmedabad, Delhi, Hyderabad, Bangalore, Chennai and Kolkata.
If you want to buy physical gold, you can take the paper gold route and then convert it into physical gold. E-gold offers the best option. The investor can convert his e-gold units into bars or coins of 99.5% purity. The delivery needs to be in multiples of 8 g, 10 g, 100 g or 1 kg. However, this facility is available only in Mumbai, Delhi and Ahmedabad, and delivery must be taken within 15 days of the request. The entire process involves some costs—making and packaging charges, delivery charges, VAT and other dues.
Gold ETFs also offer the buyer the option to convert them into physical metal, but this can be done only in multiples of 1 kg, though Motilal Oswal AMC offers physical delivery of gold in multiples of 10 g. Here, too, there is an additional delivery charge, which includes transportation, insurance, storage, delivery, administration, signature verification, document verification, etc. The facility is restricted to Mumbai, Ahmedabad, Bangalore and Hyderabad as of now.
If you invest in gold futures, you can convert your position into physical gold. Commodity exchanges offer several smallsized contracts, with the most important among them being Gold Mini (100 g) and Gold Guinea (8 g). Here, again, the buyer has to pay the making charges ( 200 per Gold Guinea) and other statutory levies. Since these are national exchanges, you will be able to take delivery of the physical gold in major cities, including Mumbai, Ahmedabad, Delhi, Hyderabad, Bangalore, Chennai and Kolkata.
Where
is gold headed?
Despite
the recent correction, gold prices are likely to stay firm. Narendra Nathan
finds that the factors that fuelled the rally are still in place.
Euro crisis could spread
Though it is believed that the Eurozone crisis is under control, the recent spike in Spanish bond yields has dimmed hopes. The 10-year bond yields crossed the 6% mark—a level that had forced Greece and Portugal to seek bailouts. However, there is no improvement in those countries. The 10-year yield on Greek bonds is still at an unsustainable 21%, while the 5-year Portuguese bonds are offering 14%. The biggest worry now is that the contagion may spread to other nations. “Sovereign debt crisis is not restricted to Europe. It may spread to other highly indebted countries like the US and Japan,” says Praveen Singh, senior commodities analyst, Sharekhan. Recently, the US had lost its AAA tag after holding it for more than 70 years. Investors are losing faith in the fiat currencies and getting into gold, the international currency for the last 5,000 years. After selling gold for decades, central bankers have also started buying it back for diversification.
High inflation likely to continue
Gold has traditionally been a hedge against inflation. Given the way central bankers across the globe are printing money, inflation will remain at high levels. The European Central Bank (ECB) has pumped $1.3 trillion into the European banks in the past few months. There are fears that the US may slide back into recession because Europe is its largest trading partner. If that happens, be ready for a further stimulus. Despite high inflation, several countries like India, China and Brazil have started cutting rates to stimulate growth. So, the gold rally may continue till the inflation becomes unbearable and the global central bankers start raising the rates once again.
Gold has traditionally been a hedge against inflation. Given the way central bankers across the globe are printing money, inflation will remain at high levels. The European Central Bank (ECB) has pumped $1.3 trillion into the European banks in the past few months. There are fears that the US may slide back into recession because Europe is its largest trading partner. If that happens, be ready for a further stimulus. Despite high inflation, several countries like India, China and Brazil have started cutting rates to stimulate growth. So, the gold rally may continue till the inflation becomes unbearable and the global central bankers start raising the rates once again.
Strengthening dollar
Based on these factors, gold prices could move up at least for some more time. “The undertone in gold is still very bullish and one can expect a 15-20% gain from the current level in one year,” says Jayant Manglik. “Though a cut to $1,450 is possible around mid-year, its impact in rupee terms will be minimal because of the rupee depreciation,” says Praveen Singh. The dollar has moved from 46.11 on 6 September 2011 to 51.49 now. This 12% gain has cushioned the gold prices in India. This may be repeated in the future as well.
Based on these factors, gold prices could move up at least for some more time. “The undertone in gold is still very bullish and one can expect a 15-20% gain from the current level in one year,” says Jayant Manglik. “Though a cut to $1,450 is possible around mid-year, its impact in rupee terms will be minimal because of the rupee depreciation,” says Praveen Singh. The dollar has moved from 46.11 on 6 September 2011 to 51.49 now. This 12% gain has cushioned the gold prices in India. This may be repeated in the future as well.
Oil prices may rise further
The simmering tension in West Asia and the US-Iran standoff over Iran’s plans to develop nuclear technology are also fuelling the spurt in gold prices. The price of gold shares has a strong correlation with crude oil prices. There is also speculation that Israel may attack Iran’s nuclear facility in May-June if there is no agreement after the ongoing talks. Since Iran is the second largest oil producer in the OPEC, any action by Israel may result in a spiking of oil prices. Even if the Iran issue is settled, the risk premium for gold may not vanish. “The security premium will always be there for gold. If it is not Iran, some other issues—like the Jasmine revolution or North Korea—always seem to be there,” says Jayant Manglik, president, retail distribution, Religare Broking.
The simmering tension in West Asia and the US-Iran standoff over Iran’s plans to develop nuclear technology are also fuelling the spurt in gold prices. The price of gold shares has a strong correlation with crude oil prices. There is also speculation that Israel may attack Iran’s nuclear facility in May-June if there is no agreement after the ongoing talks. Since Iran is the second largest oil producer in the OPEC, any action by Israel may result in a spiking of oil prices. Even if the Iran issue is settled, the risk premium for gold may not vanish. “The security premium will always be there for gold. If it is not Iran, some other issues—like the Jasmine revolution or North Korea—always seem to be there,” says Jayant Manglik, president, retail distribution, Religare Broking.
Demand will remain high
While the gold ornament business is down, gold imports continue unabated. “There is a steep increase in demand for gold coins and bars for investment purposes,” says Hasmukh Bafna, president of the Gold Chains & Jewellery Wholesalers Association. The budget had imposed curbs on the use of unaccounted money to buy gold, but the powerful jeweller lobby has received some oral promises from the finance minister. Meanwhile, gold demand is picking up in a big way in China, which overtook India as the biggest consumer of gold in October-December 2011. The World Gold Council estimates that China will unseat India as the biggest gold market in 2012.
While the gold ornament business is down, gold imports continue unabated. “There is a steep increase in demand for gold coins and bars for investment purposes,” says Hasmukh Bafna, president of the Gold Chains & Jewellery Wholesalers Association. The budget had imposed curbs on the use of unaccounted money to buy gold, but the powerful jeweller lobby has received some oral promises from the finance minister. Meanwhile, gold demand is picking up in a big way in China, which overtook India as the biggest consumer of gold in October-December 2011. The World Gold Council estimates that China will unseat India as the biggest gold market in 2012.
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