Strike Gold: This Dhanteras And Everyday
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It is a mere co-incidence that when you read this on October 28, you will also be celebrating Dhanteras on the same day- the auspicious day when people oblate to be blessed with prosperity. But it is not a co-incidence that the precious yellow metal has outperformed Indian equity indices yet again this year. Taking the cues, we have prepared this report for our reader-investors guiding them further on the journey to strike gold.
Come festive season in India demand for gold gains traction after a dull season due to monsoon. Everyone in India discusses gold prices whether he ends up buying the bright metal or not. Gold has long captured human imagination and it's a global phenomenon and still catching up further. Demand for gold has picked up recently and what can surprise many is the data on pick-up in demand in the form of investments in gold from the western countries.
Gold price has gained handsomely outperforming Indian equity indices over one-year period. This is despite Indian equity indices being the best performing indices, globally being ranked 4th only after Brazil, Argentina and Russia if we consider the performance since March this year. In the chart below we can see the negative correlation between Gold prices and equity indices in India.
Gold Demand:
For countries like India and China the increasing gold demand is closely correlated with increasing income or wealth. In other countries, especially western nations jewellery and technology demand are positively correlated to economic growth
Gold, owing to its various features such as malleability, ductility and resistance to corrosion has some unique industrial demand and usage.
Gold demand in Q2 was healthy taking cues from the trend in previous quarter. Globally demand for expensive jewellery was subdued even as the gold price kept positive momentum intact. Most interesting aspect of gold demand this time around has been the pickup in gold demand contributed by the investment demand in the precious commodity for two consecutive quarters. This pick up in investment demand in Gold for two consecutive quarters is a record in itself.According to World Gold Council, investments in gold in the first half year of 2016 has been extraordinary and is higher by 16 per cent than the previous high of the first half year investments that took place in the year 2009 which was marred with global financial crisis . A definite surge in investment demand was seen from investors in the US and European nations who took a preference for gold bars, coins and gold ETFs. Gold prices while reflecting volatality rose 25 per cent in US$ terms and reflected the best H1 since 1980. The bullion registered a stellar 17 per cent Q1 gain and followed it up by second quarter gain registering the strongest H1 performance for more than 35 years. Indeed in US$ terms gold was one of the best performing asset in the basket of commodities.
Several factors such as Brexit, US elections, unrest in Middle East, poor conditions of banks in Europe, negative interest rate policy (NIRP) IN Japan and Europe combined with expectations of a slowdown in the cycle of US rate hikes have kept gold in investors watch-list. Few experts believe the long term down trend in gold prices is coming to an end. The heightened global uncertainty is keeping gold prices firm and the trend is expected to be intact for gold prices even in near future.
The demand for gold backed ETFs also saw steady rise in the first half. Gold ETFs demand reached almost 580t which excessed even the H1 2009 demand. The gold backed ETFs demand in 2009 was 458t in a single quarter. The demand for gold ETF was seen not restricted to western world with Chinese investors continuing to add to their gold investments and holding almost 24.4t by the end of June 2016 which indicates a fourfold increase since the end of last year. The Chinese gold-backed ETF holdings grew from US$215 mn to over US$ 1 bn in the first six months of 2016.
World gold council research suggests Jewellery is negatively correlated to price but positively related to income, and in some countries, to inflation. At the global level, for every 1% increase in price, jewellery demand falls by 0.6%, but a 1% increase in world GDP leads to a 4.3% rise in jewellery consumption.ETF demand is driven by price and uncertainty. A 1% increase in price raises demand by 1%. And, a 1% drop in GDP increases ETF demand by 3%
Conclusion: -
It would be comforting to investors and especially analysts if Gold could fit within traditional valuation models the way we do with financial assets. Valuing gold is, in essence,to a large extent-intuitive. Gold demand gets a boost due to economic growth and uncertainty. Gold is a classic global asset and demand tailwinds from one region may counteract headwinds from another and this very contradicting facts may act as hurdle for the asset but at the same time these contradictions make a case for investing in Gold.
With increasing awareness, more and more people are expected to increase their participation in gold investing via gold-backed ETFs. The demand for gold will remain intact due to increasing uncertainty in the global business environment. With geo-political tensions on rise gold is expected to be in focus. While there may not be a strong case to shift financial assets into gold right now, a case for some gold allocation is on. With record investments happening in gold-backed ETFs , globally gold price can be expected to be steady with positive bias even though the profit taking in gold may create some headwinds for the asset prices.
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Chirag Mehta
Sr. Fund Manager, Alternative Investments, Quantum AMC
Gold ETF in India
What we have seen is demand for gold ETF moves, is in line with the physical demand. Whenever there is high demand for physical gold, the overall demand for gold is high, and that point of time the demand for Gold ETF is also seen which suggests us that some are choosing Gold ETF as a vehicle to buy Gold. The approximate investments in Gold ETF in India is Rs. 6000 crore.
As the awareness of Gold ETF increases more people are expected to shift to Gold ETF as a form of buying as compared to physical gold because you see the cost efficiencies of the gold ETF are much higher compared to the traditional form of buying gold like jewellery , coins or bars.
Why Gold ETF
Gold ETFs are one of the best financial innovations that we have seen, because they allow a retail investor even buying half a gram of gold at prices which are closer to the prices at which tons and tons of gold get exchanged between a Gold producer or a miner and a bullion bank. So the transaction is taking place between a gold miner who produces gold and a bullion bank that buys wholesale gold from the gold miner directly, and at those kind of prices you are able to buy half a gram of Gold. That really translates into the wholesale price efficiency taken in to the retail level. It was not possible before with the physical form in any form you would have bought.
The lower the denomination you buy in the physical gold the higher is the premium you have to pay. When it comes to gold ETF, even if you are buying a low denomination gold still you are not paying those very high premium or making charges as in the case of physical gold. That is one and secondly people don't have to worry about storage, purity and safety of the gold.
Umesh Mehta
Head of Research, SAMCO Securities
Gold is still from a longer term perspective into a bearish to sideways price pattern. The price action in India can be dubbed as a complex corrective pattern, due to local currency effect. However internationally gold in dollar terms is in a bear market, as the frenzy of 2011-12 top has led to continuous downward spell. The sequence of lower tops and lower bottoms on a weekly chart confirms the bearish stance in dollar terms. In the medium term gold is witnessing a bear market rally which is likely nearing its end and fresh downward spiral can be expected any time soon.
In India gold has recently made a triple top on a larger time frame. RS.32000/- to 33500/- is acting as strong resistance levels. In India gold is expected to oscillate in a wide band of RS.32000/- on the upper side and RS.24500/- on the lower side. Aggressive asset allocation is not warranted at this juncture, but RS.25000/- would act as a good buying opportunity. Upward revision in interest rate by the US FED and inflationary expectations will be major negative factors for gold while geopolitical tensions would support slight strengthening of the prices.
Somasundaram PR
Managing Director, India, World Gold Council
Are investments in Gold ETF by individual investors increasing in India or people are still preferring to buy physical gold?
At the outset, we have to acknowledge that ETF is fully backed by gold, so it is part of physical demand, though given its easy liquidity and other features, it is explicitly for investment purposes. Gold ETF has shown the highest growth globally in H1 2016. In India, ETF witnessed healthy growth till 2012 but has since shrunk, beginning with the uncertainties around imports during 80:20 rule coupled with softness in prices till late 2015.
In 2016, though gold prices went up by 27 percent in the first half in INR terms and despite trade strike that affected physical retail purchases, ETF demand pick up has not been in sync. The Sovereign Gold Bond, which is linked to gold prices, offers ETF-like features, substituting sovereign guarantee in place of physical gold backing, with the added benefit of interest, and this perhaps has chipped away potential ETF demand.
We believe physical gold backed ETF or ETF-like investment or savings product through the mainstream channels has huge potential in India, though physical demand for bars and coins will remain the predominant form of investment in gold for the foreseeable future.
Gold prices have beaten Sensex returns in one-year time frame.What in your view have been the reasons behind the gold price rise?
Gold is fulfilling its classic role as a safe haven asset and is performing exactly in a manner that many investors who bought it will have hoped. Gold prices jumped 6 percent post the Brexit, amid the rising global uncertainty. A weak Japan bond auction in August had a huge impact on the global gold prices. This was the result of investors questioning the effectiveness of unconventional monetary policies. The investors made the most of the price rally and were encouraged to include gold in their portfolio. Gold has been one of the best performing assets so far this year, outpacing all major benchmark indices and with comparable volatility
to stocks.
Kunal Shah
Head Of Commodities, Nirmalbang
Gold prices have corrected lately from $1380/ounce to $1250/ounce as investors were seen booking profit. Global bond yields specially of developed economies bottomed out and with better than expected economic reports from U.S. and hawkish comments by some of the senior Federal Reserve official indicated another rate hike of 25bps is very likely in coming months. Meanwhile jewellery demand and investment demand remained subdued in India. Gold prices are inversely correlated with U.S. 10 year bond yield and U.S. 10 year bond yield have surged from 1.5 to 1.8 in last one month.
The way gold prices have corrected it seems that gold have already discounted 25 basis points rate hike by the Federal Reserve. Interestingly some of the European Central Banks officials have been vocal about tapering of their bond purchase program which is also seen negative the bullion but after the sharp fall and due to festive season we expect demand of gold in India to pick up.
Gold has outperformed during the year 2016 and recently fall in prices raises questions that whether we are going to see another sharp fall and we believe that fall from here would provide good opportunities for investors who have missed the bull run as still there is lots of uncertainty on geopolitical front and if inflation starts picking up in U.S. then again investment demand of gold will shoot up. Central bank buying is also likely to remain strong going forward and Chinese demand too will remain strong for the yellow metal.
We believe that gold still can outperform other asset class and we remain bullish in gold more than price target we believe looking at uncertainties in global economy can trigger another round of safe haven buying in gold and more than any price target we feel one should remain invested in gold to hedge themselves against economic uncertainties.