Gold is “ a better investment for the people who understands some economy

and it could be played in three ways

 investment in the short to medium term, given the increased
demand for gold as a safe haven by central banks and gold ETFs in
recent times. While gold prices have risen sharply by 33% Y-o-Y, it is
likely that this can continue given the geo-political and economic
uncertainties.
 portfolio hedge provided allocation is significant and rebalancing is
done periodically.
 consumption using sovereign gold bonds.

I Gold as an investment

Gold returns depend on international gold prices and exchange

rates:
Gold return in local currency terms is dependent on international gold prices
(eg London Metal Exchange gold prices or India Bullion & Jewelers
Association) and rupee exchange rate.

Gold prices have risen sharply by ~ 21% in H12019, driven by 8 per cent rise
in gold demand. The demand rise can be attributed to
 77% growth in global Gold ETFs
 57% growth in gold purchases by Central Banks in US and other major
markets & monetary policies

Global Gold Demand has risen by 8%

Y-oY
H1 2018 H1 2019 increase
1,04 1,06
Jewellery 8 2 1%
16 16
Technology 5 1 -2%
57 58
Investment 0 4 2%
6 10
ETFs & similar products 1 8 77%
23 37
Central banks & other inst. 8 4 57%
2,02 2,18
Gold demand 1 2 8%

Rupee is expected to depreciate further in 2019 given the geo political

uncertainty and trade tensions, positively affecting gold returns.

Gold returns have a low correlation to other asset classes and definitely
preferred over negative yielding debt
Please see the low correlation to other asset classes and ideal
diversification/hedge during market

India - Gold safe haven asset class during economic uncertainties

Inverse relationship between GDP growth (India) &

Gold prices
4000 9.0

3500 8.0

7.0
3000
6.0
2500
5.0
2000
4.0
1500
3.0
1000
2.0
500 1.0

0 0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

Gold Price (INR/gm) GDP growth (annual %)

Where to invest - Gold Fund vs Gold ETFs – Gold ETFs is a winner

due to better liquidity
Gold ETFs are funds that invest in physical gold of 99.5 per cent purity. On
the other hand, a gold fund is an open-ended fund that invests in a gold ETF.
For an investor, buying a gold fund is easier as one doesn’t need a demat
account, which is required to invest in a gold ETF.

Returns of gold ETFs are superior vs gold funds, with returns higher by about
4 per cent in the last one year. However, returns across gold ETFs do not
vary much and hence tracking error vs physical gold returns is similar. The
main selection criteria include the fund house and liquidity. Here, Reliance
ETF Gold BeES and HDFC Gold ETF score higher, due to lower bid-ask
spreads or better liquidity.
Comparison across Gold ETFs
Fund Launc 1- 3- 5- Assets ( 4th
h Year Year Yea Rs cr) Sep
Ret Ret r 2019
Ret ETF
price
Reliance ETF Gold Mar-07
31.38 7.34 6.79 2,877 3549
BeES
SBI Exchange Apr-09
32.03 7.25 6.67 799 3628
Traded Fund Gold
HDFC Gold Aug-
Exchange Traded 10 31.83 7.65 6.83 615 3643
Fund
Physical Gold 33.30 8.40 7.78

Tracking error: Returns of ETFs are indicatively upto 2% lower than those of
direct gold
Please note that Reliance ETF Gold BeES and HDFC Gold ETF are more liquid
than other ETFs
Source: AMFI

While sovereign gold bonds enjoy higher returns due to the inherent 2.5-
2.75% interest they enjoy, liquidity levels for the ~ 30 sovereign bonds
trading on the exchange is the least. Hence, not been assessed.

Timing & monitoring of gold investment is critical; gold is classified

as moderately high risk asset by mutual funds
Medium term track record: Historically gold returns during uncertain
market conditions have outperformed other asset classes. During the market
crash of 2008, gold prices (INR/gm) rose at a 23% CAGR between Jan 1, 2008
to Jan 1, 2013 (ie upto to Rs 2,964/gm from Rs 1,056/gm respectively). Gold
price returns in the subsequent years were negligible, hence, if the same
investment of Jan, 1, 2008 was held till Jan 1, 2019, returns would have fallen
to ~ 9%.

Long term track record of returns in the Indian context: A study done
over ~ 40 year period (1979-2019H1), reveals that while Sensex grew by ~
360 times or CAGR of ~ 15%, gold returns were ~ 60 times or a CAGR of ~
10%, largely due to currency depreciation (> 9 times) and the rest was due
to gold.

RISKS in Gold Investing

1. Volatile asset class: Gold while being considered as a safe haven
investment when financial markets are turbulent and economic
uncertainties prevail, is considered to be an extremely volatile asset class.
A study conducted by Freefincal indicates volatility is significantly higher
than equity or debt when rolling returns are assessed over 5, 10, 15 years
period (https://youtu.be/sHHBf7PZ1so). This clearly indicates that gold as
an investment needs to be carefully monitored.

2. Gold is not an income generating asset:

Unlike bonds and equities which give interest and dividend payments,
gold is not an income generating asset by and large. An exception is gold
sovereign bond which gives 2.5% to 2.75% semi-annual interest on the
bond. Warren Buffet does not invest in gold as it believes that besides
making jewellery, it does not serve a ‘usefulness purpose’.

3. Tightening of the monetary policies by central banks:

Monetary policy is an important driver of gold prices. Monetary policy
affects the money supply growth which in turn determines the inflation
rate (in the long run). And gold is, under certain conditions, an inflation
hedge. When money supply tightens, usefulness of gold as a hedge is
lost.

II Gold as a portfolio hedge

Allocation of upto 20% in gold can lower risk of a portfolio when markets are
turbulent, and provide a cushion to the existing returns in equity and debt.
However, gold allocation needs to be sizeable and the portfolio needs to be
periodically balanced. Moreover, given gold returns are volatile, entry and
exit of this investment is crucial.

As seen in Example 1, in very turbulent times, as in the case of 2008, gold

can cushion portfolio returns to the extent of 10% if the gold allocation is
20%.
Example 1 (No gold): Portfolio pre and post Market Crash - 2008
Investment on % Return in Investment on
Jan 1, 2008 2008 Dec 31, 2008
Equit 60 60% -50% 30
y
Debt 40 40% 7% 42.8
100 72.8
Please note: Return assumptions across asset classes are indicative

Example 1 (With gold): Portfolio pre and post Market Crash – 2008
(Equity + Debt)
Investment on % Return in Investment on
Jan 1, 2008 2008 Dec 31, 2008
Equit 48 48% -50% 24.0
y
Debt 32 32% 7% 34.2
Gold 20 20% 20% 24.0
100 82.2
Please note: Return assumptions across asset classes are indicative

As seen in Example 2, under slowdown market conditions, with a gold

allocation of 20%, the portfolio value is maintained.

Example 2 (No gold): Portfolio pre & post Market Slowdown - 2019
Investment on % Return in Investment on
Jan 1, 2019 2019 Dec 31, 2019
Equit 60 60% -15% 51
y
Debt 40 40% 7% 42.8
100 93.8
Please note: Return assumptions across asset classes are indicative
Example 2 (With gold): Portfolio pre & post Market Slowdown - 2019
Investment on % Return in Investment on
Jan 1, 2019 2019 Dec 31, 2019
Equit 48 48% -15% 40.8
y
Debt 32 32% 7% 34.2
Gold 20 20% 20% 24.0
100 99.0
Please note: Return assumptions across asset classes are indicative

III Gold as consumption

If gold is considered by the user for consumption at a future date, then gold
sovereign bonds are useful. For instance, if one wants to purchase gold for
one’s child’ marriage 8 to 10 years down the line, then investing in gold
sovereign bond (tax free with a lock-in period for 8 years earning 2.5%
interest semi-annually), is attractive. This investment tracks gold price, for a
later day consumption.
 GOLD AS AN ASSET CLASS – OPTIONS
Parameters Gold ETF Gold Fund Sovereign Gold Physical Gold
Bond
Issuer Mutual Funds Mutual Funds; RBI through fresh Gold bars/jewels
Gold Funds issuance or through from jewellers
invests in Gold secondary market
ETFs
How to Buy Demat Mutual Fund Directly from Jeweller/Banks
Account Account Banks/Post
Office/Demat
Investment Minimum 1 SIP possible Minimum 1 gram No limit
limit gm, No and maximum 4 KG
maximum for an individual (as
limit, No SIP per rules for SGB
possible 2018-19). SIP not
possible
Issue Price - - Issued in tranches -
during the year &
priced at simple
average of closing
price of gold of 999
purity, published by
IBJA for the last 3
working days of the
week preceding the
subscription period
Physical Some ETFs giv Not Applicable Not Applicable Yes
Delivery e the option
subject to a
minimum
quantity (say
500 gms/ 1 kg)
Total returns Lower than Lower than Higher than actual Lower than actual
actual return actual return return on gold (Due return on gold.
on gold, on gold, to the 2.5% or Please note 3%
 depends on depends on 2.75% semi annual GST charged on
tracking error, tracking error, interest paid on the gold plus making
expenses and expenses and bond) charges
exit loads exit loads
Financial Expense ratio Expense ratio 1% commission is Making charges of
transaction capped at 1%; capped at 2% paid to the upto 5-15% can be
costs/Expense Brokerage commercial present
s charges, but banks/post offices
no STT
Exit Loads No Typically 1% 5 years lock in, but Not applicable
before 1 year can be traded on the
exchange within a
fortnight of
purchase
Taxation Tax treatment is like debt: long- Capital gains taxed Long term capital
term capital gains is lower of similar to debt; gains tax
10% without indexation and Interest is taxable applicable after 3
20% with indexation. Short- (No capital gain tax years plus wealth
term capital gains will be added if bonds are held till tax
to income and taxed at the maturity ie 8 years)
marginal income tax rate.
Tradeability / Tradeable on Tradeable on Tradeable on Realisable value by
Liquidity Exchange, Exchange, Exchange, however selling to
Liquidity is Liquidity is liquidity is low. Can jewellers/private
high high be redeemed by RBI gold buyers will be
from 5th year subject to purity
onwards level of gold and
will be net of
making charges, if
any
Safety and Safer in terms Safer in terms Safer in terms of Higher risk of theft
Security of reduced risk of reduced risk reduced risk of theft than other forms
of theft of theft
Gold as a No No Yes Yes
collateral for
loan?
Purity Check High (as it is High (as it is High at 0.999(as it is A big concern
held in held in held in electronic
electronic electronic form)
form) form)
Storage Cost Low (held in Low Very low (The bond Can be high if kept
demat form). is issued by RBI and in locker (locker
Demat account is held in the books cost)
charges may of central bank.)
be spread over
 several
securities.