By Dr. Ravi Singh
Vice President & Head Of Research
Karvy Stock Broking
Gold has an exceptional place among Indians. Traditionally, Jewellery and coins/bars have been the preferred choice of holding gold for retail investors. Investors of late are coming out of the traditional model of investment in coins and ornaments and are exploring new investment options like gold ETFs and sovereign gold bonds.
Gold Exchange Traded Fund (ETF’s)
Investors can look at ETFs as an option wherein they can invest in the commodity without physically holding it. ETFs, come with the added advantage of liquidity and transparency when they want to liquidate their investments. However, due to a lack of awareness gold ETFs are yet to receive a wider acceptance as in the case of equities. Research suggests that 27% of urban and 21% of rural India who is yet to purchase gold still prefer holding the commodity physically. The investments in ETFs are pretty much from the same category who invests in equity, and in recent months the churn has been between the gold and equity.
Sovereign gold bonds (SGBs)
Sovereign gold bonds (SGBs) are another investment option for retail investors. SGBs are issued by RBI on behalf of the government and are redeemable on maturity. Investors can purchase the bonds by paying cash and yet ride the rally in its prices without having to worry about making charges and purity of gold. These bonds have a maturity tenure of 8 years, but after a five-year lock-in period, you are allowed to sell gold bonds on exchanges. There is complete transparency in the pricing. With the premature exit option available after the lock-in period of five years, investors who bought the first issue of SGBs in Oct 2015 could reap huge profits. Their current profits stand at 90% on an absolute basis and 14% in terms of CAGR.
Reasons for Price Fluctuations
Gold is cherished for its store of value, but it is not free from price volatility. Why its prices fluctuate? There is a wide range of factors involved. Global financial markets perceive it as a safe haven asset, and the price tends to move up when there is heightened uncertainty in global markets due to geopolitical tensions, international financial crises, or like the current pandemic we are experiencing right now. This uncertainty, coupled with central bank buying, has led to gold returning 25% YTD in 2020.
In the context of markets, it is referred to as ‘risk-on’ and ‘risk-off’. During ‘risk-on’ all risky assets including equities, base metals, and emerging market currencies will rally and outperform its prices, and vice versa happens during ‘risk-off’. During the 2008 financial crisis and subsequent PIIGS crisis, gold rallied very hard and made life highs. It is inversely correlated to the US dollar. During times of depreciating dollar, be it due to loose monetary policy or during times of loose fiscal policy US dollar tends to depreciate which in turn would lead to a rally in its prices and vice versa. In 2013, when the US Fed announced the reversal of quantitative easing referred to as ‘taper tantrum’, the gold price corrected sharply.
Factors that affect the demand trend in gold
Four factors that make investors attracted towards it more than any other asset and keeps the demand float in the future
– A trusted source of returns for investors’ portfolios
– It has historically been seen to improve the risk-adjusted returns for the portfolios
– One of the mainstream assets which is almost as liquid as the other financial securities.
– During both the expansionary and recessionary periods, the correlation of gold to the other major asset classes has been low.
Apart from the above, its ability to be used as valuable collateral and improve risk-adjusted returns are also the reasons why Central Banks around the world keep buying it. The ongoing economic tensions with respect to the trade war, economic sluggishness, and mainly the pandemic have contributed to the reasons for the recent bullish trend in the yellow metal. The current volatility in the gold will continue until clarity arises on the third phase trials wrt to the success or failure of the ongoing Covid-19 vaccine trials.
What is the future trend?
Given the current technical trends, we may buy the gold if it comes towards 47000 levels, and in a couple of months, we expect to see the its prices around 55000 levels.
