“Borrowers will default. Markets will collapse. Gold will skyrocket.” - Michael Belkin
During apocalyptic times, every investor wants to move his investments to safer options. The emergence of gold in this regard has been remarkable.
During apocalyptic times, every investor wants to move his investments to safer options. The emergence of gold in this regard has been remarkable.
Gold - value investing
Gold is considered a preserver of value, making it a good hedge during inflation. Gold is a unique commodity - while it is part of the basket of commodities and broadly moves in line with commodity prices, in periods of uncertainty, it can move in the opposite direction or have a lower impact. Gold is also a depleting commodity, which will continue to thrust the prices higher in the long term. While it is well known that gold is a coveted commodity across the globe, East-Asia, the Indian sub-continent and the Middle-East accounted for 72% of world demand in 2007.
Gold is considered a preserver of value, making it a good hedge during inflation. Gold is a unique commodity - while it is part of the basket of commodities and broadly moves in line with commodity prices, in periods of uncertainty, it can move in the opposite direction or have a lower impact. Gold is also a depleting commodity, which will continue to thrust the prices higher in the long term. While it is well known that gold is a coveted commodity across the globe, East-Asia, the Indian sub-continent and the Middle-East accounted for 72% of world demand in 2007.
A significant part of the gold demand comes from sales and disposals. With volatility in currencies/financial markets, central banks could end up increasing the composition of gold in their reserves. This is likely to create additional demand for the commodity, thereby pushing the prices further up.
Gold vs other commodities
Like most other markets, commodities also underperformed as an asset class in the third quarter of the calendar year, as investors became increasingly concerned about the strength of spillover effects to the real economy. Gold also saw a dip in prices from record highs. However, the fall has been much lower than in other commodities probably due to the flight to safety.
Like most other markets, commodities also underperformed as an asset class in the third quarter of the calendar year, as investors became increasingly concerned about the strength of spillover effects to the real economy. Gold also saw a dip in prices from record highs. However, the fall has been much lower than in other commodities probably due to the flight to safety.
Interestingly, except lead, all commodities took a battering during the global financial meltdown. Tin, palladium, aluminum, platinum, copper, silver and nickel each fell by over 20% during the quarter. Gold was the second best performing commodity, behind lead, falling by just 5%.
Energy (brent crude), another key indicator of the strength of the economy, also took a strong dip. However, there is limited correlation seen between gold prices and crude prices in the long term. Over the past twenty years, gold and oil have moved in the same direction twelve times; but in opposite directions, eight times.
Bullion and capital markets correlation
It is interesting to see that gold is negatively correlated to equities; this has been the trend over many years. The trend can be related back to September 2005, when the markets slipped below 8,200, intra-day, closed with a loss of 265.50 points at 8,221.64 on September 22, 2005. At the same time, gold was seen to be trading at an all time high of Rs 6,780 per 10 gram. It is no different today, Sensex has dropped from a close of 20,301 on January 1 to 13,802 on June 27 - a whooping 32% drop; in the same period gold prices went up a whopping 18.01% in absolute terms.
It is interesting to see that gold is negatively correlated to equities; this has been the trend over many years. The trend can be related back to September 2005, when the markets slipped below 8,200, intra-day, closed with a loss of 265.50 points at 8,221.64 on September 22, 2005. At the same time, gold was seen to be trading at an all time high of Rs 6,780 per 10 gram. It is no different today, Sensex has dropped from a close of 20,301 on January 1 to 13,802 on June 27 - a whooping 32% drop; in the same period gold prices went up a whopping 18.01% in absolute terms.
A contrarian can take the cue from capital markets and move out of equities into gold, at peaks. One can do it in phases at key resistance and support levels. Gold is likely to rally when the equity market sees a down-trend. Further, gold is a more stable asset class in the long term; therefore, a good stability provider and a unique diversification tool as well.
Investing in Gold
India has an affinity towards jewelry, given their importance on all festive occasions. In ancient India, gold jewelry came into being, because people did not have access to banking and other financial instruments to preserve wealth. Jewelry, at that time, was the most convenient and most efficient medium of storing and preserving family wealth.
Today, however, if one intends to hold gold in physical form, it is best to consider holding it in the form of coins, biscuits, etc. and not in the form of jewels. A more popular form of holding of this asset globally, which has caught the fancy of the Indian investor, is the ETF (exchange traded funds). Gold ETFs are open-ended mutual fund schemes that invest in standard gold bullion (0.995 purity). The investment will be denoted in units, which will be listed on a stock exchange. They can be bought and sold on a real time basis, based on price movement of gold.
Gold Mining Funds launched recently in India are mainly feeder funds - they are funds which conduct investment through another fund which is the master fund, normally which has run successfully around the globe. The master fund invests in precious metal mining companies. Currently, there are only two such Gold Mining Funds AIG World Gold and DSPBR World Gold. Do keep in mind that this is a higher risk/return product since it invests in the stocks of the mining companies. Returns have been significantly better. For instance, the GDM index, an index of gold miners, has moved up 6.5 times since 2000 as compared to gold price which has increased by 3 times during this period. However, the recent fall has been very short on these two funds.
One should keep in mind that gold has also become pretty volatile of late, in line with most other asset classes. While gold and equities are negatively correlated, there are points of time when both move in the same direction. This requires a contrarian investor to make a more careful study before deciding on investing/exiting from gold. One can allocate about 5%- 15% of ones funds into gold - this can be through a mix of physical holding and virtual holding, although one has to keep in mind the costs involved and the risks thereof.
TIPS FOR THE WEEK
Gold is a good diversification tool for an equity investor, due to their inverse correlation.
It is also a good hedge against Inflation - since it is a store of value.
If you prefer holding physical gold - buy coins, biscuits or bars. Jewelry is not considered as an investment due to high transaction costs.
Hold a part in the form of ETFs /Mining funds, which will offer easier liquidity and lower risk of theft.
On an overall basis, have about 5%-15% of your portfolio in gold; do not overdo!
Manage the volatility of gold through phased investments.
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