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Gold investment? Better
than FDs! |
Thought to be one of the first known metals, gold
has been coveted throughout history for its beauty, scarcity, malleability,
and uncanny resistance to rust and corrosion. Centuries ago, gold's unique
combination of properties -- its sun-like colour, its soft hardness, and,
especially, its imperviousness to decay and corruption -- imbued it with
magical associations in the eyes of many.
Because of
these unique properties, gold has traditionally been the currency of choice
for much of the world's population. The value of gold has transcended all
national, political, and cultural borders, making it the ideal currency.
Historically
gold prices were determined by a combination of political and economical
factors, till a universally acceptable concept of London and American gold
price was institutionalised. An outcome of such initiatives was the
Washington Agreement. However, in the past few years, the major factors
impacting the gold price can be summarised as under: |
-
Weak
US dollar
-
Growth in demand for jewellery
-
Increase in demand for exchange-traded paper backed products
|
Weak
US dollar
Projections about a declining dollar due to an ever-increasing twin deficit
supported by many investment veterans are met by much denial from
politicians as well as from investors.
As long
as foreigners are willing to pour in the amount of $2 billion every working
day, the dollar won't crash. But if foreign confidence were to wane, the US
dollar will be heading south.
No
matter how you look at the US twin deficits and America's future fiscal
liabilities, this problem is huge and some painful adjustments not only seem
to be necessary but unavoidable as well. It should be obvious that one of
these major painful adjustments will be a massive devaluation of the US
dollar.
It seems
that the idea of a dollar devaluation is gaining support from the Fed when
the president of the Dallas Fed, Robert McTeer recently said: "Over time,
there is only one way for the dollar to go -- lower."
Former
ECB president Wim Duisenberg, quoted by Spanish Newspaper El Pais, recently
said: "A dollar devaluation seems inevitable due to the tremendous US
Current Account deficit." Furthermore he recently said on Dutch television
that we can only hope and pray for a smooth economic transition in the US.
Why is
this so important? Simple, the US dollar is the key driver for gold; as the
dollar goes, so will gold; but in the opposite direction. Gold is the
anti-dollar with a high inverse correlation to the dollar!
In the
end, gold is still a monetary asset and trades like a currency.
Growth
in demand for jewellery
In spite
of the convergence of diamond and palladium, the demand for gold jewellery
has seen a regular growth year-on-year. Countries primarily responsible for
this growth are India, China, Italy, Turkey and the USA.
The
demand for consumption of gold in jewellery was 6% higher at 735 tonnes and
also comprised a new first-quarter record. The US, which accounts for 10% of
world gold demand, is also one of the markets where public taste in gold
jewellery is enjoying a renaissance.
The
renewed interest in gold also extends to Japan, a market which showed a 19%
increase in demand. The Indian market -- the world's largest for gold demand
-- was 23% higher following the marriage and festival period which, in turn,
has led to restocking by retailers.
The
earthquake in India, however, is unlikely to hit demand significantly as it
occurred in an area which comprises only 5% of the total Indian consumption.
There were sharp falls in demand in Turkey and Taiwan -- down 38% and 31%,
respectively. This was due to economic difficulties and continued weakness
in investment demand.
Increase
in demand for exchange traded paper backed products
For the
first time in history, gold can be purchased like any listed stock at select
stock exchanges of the world like London Stock Exchange, Australian Stock
Exchange (Gold Bullion Securities) and New York Stock Exchange (StreetTracks
Gold).
The
World Gold Council initiated Electronic Traded Funds have displayed very
good performance and growth in volumes since launch. |
Factors
affecting gold prices in last 3 years
If we analyse
the track record of gold in the past three years, we can conclude that gold
prices have seen a steady and impressive northward growth.
In January
2002, gold prices per 10 gm stood at Rs 5,453. By November 2004, the price
had gone up to Rs 7,005. The year 2004 has indeed been a great year for
gold.
There has been
a substantial increase in gold prices, but this has not dampened consumers'
inclination towards investments in gold. In fact, investors have begun to
recognise the effectiveness of gold as an efficient savings vehicle and an
alternate asset class.
The graph below
is indicative of the quarterly price of gold in Indian rupees per 10 grams
from November 2002 to November 2004 showing the upward movement. |
|
The
following table gives us the all-time high gold prices touched in the
period, Jan 2000 to Nov 2004.
All time high
Year |
Amount in Rs (Month) |
2000 |
4,629 (February) |
2001 |
4,812 (October) |
2002 |
5,669 (December) |
2003 |
6,576 (December) |
2004 |
7,005 (November) |
|
In 2004,
gold prices saw a slight dip in April 2004, only to pick up again in July
2004.
Globally, the price of gold has historically been impacted primarily by the
US dollar. However, in the past few years, oil prices, the US dollar and the
demand-supply equation for gold have become equally significant contributors
to the price of gold. |
Gold as
investment
Demand
for gold for the purpose of investment has outpaced the demand for the
yellow metal for jewellery in 2004. Indians purchased 74.0 tonnes of gold
for investment from January to September 2004, while it was 67.8 tonnes
during the same period in 2003.
While
the advantages of having gold in an investor's portfolio has been talked
about time and again, 'what should be the amount of investment' is always a
question asked by the investors. There are two schools of thought on this
subject. The recommendations are in the range of a 15% to 20% allocation of
the total portfolio.
-
15% of the investment
portfolio -- European Central Bank decision at the time of establishment
in 1999 based on internal studies.
-
20% of the investment
portfolio -- Based on a model done by Germmill & Hillman on 20 years data.
Ideally,
however, allocation to gold from an investment perspective should be based
on comprehensive financial planning.
It
should always be remembered that investment in physical gold must always be
in the form of coins/bars and should be in addition to the jewellery held by
the household. Advantages of gold in a portfolio can be explained through
the following points:
-
Gold has a low to
negative correlation with most other asset classes.
-
An investment portfolio
with an allocation to gold improves the consistency of portfolio
performance during both stable and unstable periods.
|
|
-
The price of gold is not
linked to the performance of economy, industry or companies.
-
Gold offers the benefit
of diversifying portfolio risks.
Let us
consider an example where an investor invests Rs 10,000 each in various
options like equities, fixed deposit, PPF and gold in March 1999.
Let us
see what the returns are in each case, taking the deposit period 1999 to
2004 into consideration.
In gold,
by March 2004, his investment would have fetched him Rs 15,063, a
substantial increase.
The
money invested in PPF would have grown to Rs 16,025 by March 2004. A fixed
deposit of the same amount would have yielded Rs 13,794 by March 2004.
(Refer to the data below for varying interest rates) |
|
By March
2004, his investments in equities for the same amount would have become Rs
18,916. This is provided the investor had remained invested in the market
throughout the five years, even during periods when the Sensex saw huge
downward movements. |
Fixed Deposit Rates
Year |
Interest Rate |
Capital (Rs) |
1999 |
7.50% |
10,000 |
2000 |
7.25% |
10,750 |
2001 |
7.00% |
11,529 |
2002 |
6.50% |
12,336 |
2003 |
5.00% |
13,138 |
2004 |
4.75% |
13,794 |
|
PPF Rates
Year |
Interest Rate |
Amount (Rs.) |
1999 |
12% |
10,000 (Capital) |
2000 |
11% |
11,200 |
2001 |
9.50% |
12,432 |
2002 |
9% |
13,613 |
2003 |
8% |
14838 |
2004 |
8% |
16,025 |
Fixed
deposit rates/ PPF sourced from a nationalised bank |
Gains on Gold
Year |
Gold Price
(Rs.) |
YoY
Rise/Drop |
Rise/Drop
(%) |
Amount
(Rs.) |
1999 |
4,296 |
123 |
3
|
10,000 |
2000 |
4,419 |
(79) |
(2) |
10,286 |
2001 |
4,340 |
733 |
17
|
10,104 |
2002 |
5,073 |
674 |
13
|
11,810 |
2003 |
5,747 |
727 |
13
|
13,379 |
2004 |
6,474 |
|
|
15,063 |
Source:
World Gold Council |
Gains on BSE Sensex
Year |
Sensex |
YoY
Rise/Drop |
Rise/Drop
(%) |
Amount
(Rs.) |
1999 start |
3,065 |
1,941 |
63
|
|
1999 close |
5,006 |
(1,034) |
(21) |
16,332 |
2000 |
3,972 |
(710) |
(18) |
12,867 |
2001 |
3,262 |
115 |
4
|
10,577 |
2002 |
3,377 |
2,462 |
73
|
10,947 |
2003 |
5,839 |
575 |
10
|
18,916 |
2004 |
6,414 |
|
|
20,769 |
Source:
BSE |
|
Cost
efficient ways of investment in gold internationally
Owning
gold has been possible over the years in the form of mutual funds or stocks
of gold mining companies. However, investors have been awaiting a more cost
effective platform for owning gold.
The
World Gold council recognized this fact and launched the following ETF gold
products across the world.
Gold
Bullion Securities
For the
first time in history, gold was made available at the stock exchange just
like an equity share to the investors through a World Gold Council initiated
ETF product called Gold Bullion Securities.
Each
share of Gold Bullion Securities (GBS) is equal to 1/10th of an ounce of
gold and is supported by physical holding of gold in the custody of HSBC.
This is
the first time ever that a metal has been listed on an international Stock
Exchange and can be conveniently traded or invested by institutional
investors as well as individuals. GBS is listed on the London Stock Exchange
and also the Australian Stock Exchange.
At
present GBS is the most cost efficient way of investing in gold, as a
potential investor has to only pay 0.3% p.a. as management fees, which
includes the cost of storage and insurance apart from the 'brokerage' that
they have to pay to the brokers.
Street
TRACKS Gold Shares -- ETF Gold fund on NYSE
The first US exchange-traded fund that tracks the price of gold, called
Street Tracks Gold Shares, was launched on the New York Stock Exchange in
November 2004. This is the first ETF in the US that will track a commodity.
It is
designed to give investors the opportunity to invest in gold without
requiring actual custody of the metal, which can be expensive. The ETF is
expected to attract both institutional and individual investors who are
looking for a hedge against inflation and currency exchange rates, or for
diversification.
It is
sponsored by the World Gold Council and marketed by ETF provider State
Street Global Markets. Each share will represent one-tenth of an ounce of
gold bullion as priced by the London Bullion Market Association. The 2.3
million shares trade under the ticker symbol 'GLD.' |
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