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"The uncertain macroeconomic environment and looming inflationary threat over a long term reiterates the need for gold in one’s portfolio" - Chirag Mehta

| 4/19/2012 9:00 PM Thursday

Starting off his career at the absolute grass root level as an analyst Chirag Mehta gradually moved up the ranks to become a fund manager at Quantum Mutual Fund. He learnt the nuances of commodity trading and currently manages Quantum’s Commodity Fund. In a talk with Shailendra Lotlikar, he explains how investors can hedge their risks by investing in Gold .

When did you start taking commodity as your area of specialization?

I got interested in commodities in 2004 when commodities had just made their presence felt as an asset class. Actually, during my MBA, I got a chance to get trained under Suresh Kotak the chairman of Kotak & Company and who was also the Chairperson of Federation of Indian Commodity Exchange. With training under him I learnt a lot about commodities.

What is the nature of the fund you are managing and what lies there for the investors?

Currently we have a Gold ETF and a Gold Savings Fund. Both endeavor to track gold prices. Gold ETFs were a new product that launched in 2007 and we launched our fund in early 2008. It is a big challenge, in the sense that, we are custodians as we are managing someone else’s money.  We have to follow certain guidelines when we handle physical assets unlike the case in equities. We talk to professionals at the London Bullion Exchange, Refiners, domestic as well as international players and lay down the guidelines for managing the fund so that we buy the best of the gold at the best of the price that is available. But isn’t managing Gold ETFs a more passive kind of fund management? Actually the mandate of the fund is to track gold prices. We do lot of research on gold prices since we have the expertise of conducting such indepth research. Through our research we empower the investor, since they can be sure that by investing in this fund, they will be able to achieve what gold achieves.

How do we differentiate between two gold ETF’s that are available in the market?

The key differentiator between two gold ETF’s is how closely a fund manager manages to track gold prices. Whether he follows any method to track the prices or he tries to time the markets acts as the differentiator. We are the only fund to have gone ahead and done an actual purity check of the gold that we have. We did it last year as well as this year which gets published in our annual reports.

You do purity testing as and when you buy the gold?

No we do purity testing once a year for our entire stock.

How would investors actually benefit from investing in gold ETF?

From an investors point of view it is a pure diversification play. What we suggest to investors is to allocate around 10 per cent or 20 per cent on the maximum side to gold. ETFs provide this platform for diversification.

Do you see gold as only an option for hedging rather than profiting?

Currently it has been the best of both worlds. It has acted as a portfolio diversifier as well as for profiting. The factors that have played a pivotal role to take gold prices higher have not gone away. There is still high a whole lot of debt that looms large on the western world and they are still revaluing their currencies. These factors still remain and they are not yet out of the crisis that they are facing. This will keep gold in focus for at least some time in the future.

Do you believe that there is still some steam left with the gold prices from the current levels?

We are still bullish on gold prices and as I said earlier the factors that have taken gold to these higher levels still remain. The problems could intensify more as policy making has not changed much. They still believe that dolling out more money will revive their economies. This will basically add to their woes and hence the volatility in overall economic scenario will keep gold in demand.

What should be the time period that one should keep in mind while investing in gold ETF?

The period should be as long as you can really hold. You should rebalance your portfolio in a period of six months as a whole.

How do you classify your investors based on their categories?

Retail and HNIs are close to 90 per cent of the total investors that we have. It is largely the retail investors that make a bulk of investments in Gold ETF that we have. This should give you a perspective as to where and who invests in these products. In fact Gold ETFs are the best way for retail investors to ride the booming gold prices as they are not taking the risk of storing the physical gold at their end.

Do you think that Indian investors are well adept to invest in an ETF rather than buying physical gold?

The awareness has been growing in a big way. When people understand the pros and cons of investing in an ETF and buying physical gold, it will be the ETFs that will take the front seat.

Do Gold ETF qualify for a loan as physical gold does?

Not exactly, but I have spoken to some of these loan providers and they say that they have no objection in taking ETFs to provide loans as the underlying of the ETF is the gold itself. This is much better as they are assured of the quality of gold that we hold. They will be much more comfortable on accepting an ETF rather than accepting gold jewelry.

What is take on the gold prices going forward?

In 2011 gold surged from roughly USD 1400 to USD 1900 within a single year as Europe’s debt crisis aggravated, only to be followed by a 61 per cent revision from USD 1900 to just under USD 1600 in the last three months of 2011. However, there does not seem to be any change in the fundamentals that have led to the Bull Run in gold. The factors that have caused a sharp decline in gold prices seem to be of a temporary nature. This is most likely a corrective, consolidative phase in gold prices, which has been an integral part of the move and should not come as a surprise.

So is this the right time to buy gold?

Certainly it is a good time to buy gold or invest in Gold ETFs. The uncertain macroeconomic environment and looming inflationary threat over a long term reiterates the need for gold in one’s portfolio. This seems to be a good time to make a strategic allocation to gold, as it is the counterweight to paper money, which is continuously losing credibility as a store of value.


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