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WHILE most of the popular asset classes are going through bad times, the yellow metal shines on. In fact, in the last one year, gold has given a return of more than 25% and currently trades at Rs 14,695 per 10 gm. Even gold exchange traded funds (ETFs) have appreciated substantially.Gold Benchmark Exchange Traded Scheme (BeES) and Kotak Gold ETF have given more than 25% returns each in the last three months.
Even as the equity markets have taken a hit with the Sensex losing around 46% in the last one year and real estate prices also witness a correction, investors’ preference has shifted to safe havens such as gold. On an average, most of the diversified equity mutual funds have fallen and real estate developers are offering discounts. Thus gold remains the safest bet.
The appreciation in the gold prices is mainly due to its safe haven status. Says, Jayant Manglik, head commodities at Religare Commodities, “The key reason for gold to go up is lack of other investment opportunity. There is also a risk in keeping the money in currency form as most of the currencies have depreciated against one another. Moreover, most of the countries are facing liquidity problems and the currency will further depreciate if they go in for printing money.”
CONTRA MOVEMENTThe historical trend proves that gold prices have a positive correlation with inflation and crude oil price. It is considered as the best hedge against inflation. But in the prevailing economic condition, gold prices have moved in the reverse direction from both crude oil price and inflation. Where crude oil prices have corrected from $146 a barrel in the last year to $41 a barrel now, gold prices have appreciated to Rs 14,695 currently from the lowest of Rs 10,653 last year. Thus while in the last year, the rising inflation rate and crude oil prices were buttressing gold, now it’s the uncertainty, which is pushing the price up.
Says, Naveen Mathur, head, Angel Commodities, “There are several factors that impact gold prices. Crude oil price and inflation are a couple of factors. But the quantum of impact of each of these factors differs depending upon the economic condition. Currently, the impact of financial and economical uncertainty is driving gold prices up.” The depreciating rupee has further helped the gold price to go up as major portion of the gold is imported.
WHY GOLD NOW?Usually, during the time of any financial crisis gold gives good returns to investors. Since other asset classes are witnessing downside, one can look at gold as an investment opportunity. Moreover, in terms of diversification, it is always good to allocate a certain portion of the fund in gold, which generally provides higher returns without any substantial increase in the level of risk.
HOW TO INVEST IN GOLD?There are several ways to invest in gold. One can go for either physical gold or electronic forms. Many of the banks sell gold in the form of coins of different sizes and weights. Commodity exchanges like Multi Commodity Exchange gives a platform to trade in future prices. Recently, several mutual fund companies launched gold ETFs and gold funds. According to Manglik, the best way to put money in a commodity would be through commodity exchanges. ETFs are best suited for small clients.
ETF OR GOLD FUND?Gold ETFs are the most popular mode of investment in the gold among the investor community. Gold ETFs are like other mutual funds and get traded in the stock exchanges. Gold ETFs track the performance of gold and the money gets invested in the gold. Unlike gold ETFs, gold funds invest money into the shares of gold mining companies. Since the investment is made in different asset classes, performance of both kinds of funds differs significantly. In the last three months, gold ETFs have given a return of around 27% while a gold fund like DSP BlackRock World Gold Fund and AIG World Gold Fund have generated more than 55% of returns. Similarly, in the last six months, on an average, these gold funds have appreciated by merely 10%, while gold ETFs have appreciated by 29%. According to a senior official of an asset management company, since gold funds invest money in the shares, any fluctuation in the stock market will also impact their performance. Dhruv Agarwala, co-founder of iTrust Financial Advisors, says, “It is always better to go for gold ETFs. Apart from giving investment opportunity, it does not carry any risk of theft and also provides tax benefits.”
OUTLOOK & KEY CONCERNSSince it provides hedge against uncertain economic conditions, as long as uncertainty prevails gold is expected to appreciate. Commodity brokers are upbeat on gold prices. Manglik anticipates around 30% upside in gold prices from the current levels. According to Mathur, there can be a short-term correction in gold price but in six months, he expects prices to go up considerably. Gold is attracting higher investments due to uncertain economic conditions. Any favourable change in the economic conditions may hamper the price appreciation.
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