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Think of ‘this’ option while buying gold on Akshaya Tritiya

Portfolio, Chirag Mehta,

The word "Akshaya" denotes something that never diminishes and in India traditionally gold is considered as an embodiment of permanent value - hence beginnings made, or valuables bought, on this day are considered to be auspicious - certain to bring luck and success in material terms. Hence, Akshay Tritiya is the second biggest gold buying day in India and its importance to the culturally entwined Indian mindset cannot be understated when it comes to purchasing gold.

Gold prices have seen a decent rally, as anticipated, post the US Fed rate hike, last year. Investors would be contemplating whether they should be buying gold now given the sharp run up in prices post the hike. Gold markets, after their fair share of correction, have started rising. This rise in price is not merely ‘gold plated’ but is supported by strong fundamental macro factors. Though being a Gold ETF provider, our views haven’t been biased but rather based on our deep understanding of the market.

We asked investors to refrain from buying gold in 2014 due to our view on gold and the penalizing premiums prevailing at that point of time (Click here to read). We were of the view that 2015 was a good time to allocate to gold, as prices were been pressured by speculative selling in anticipation of the Fed rate hike.

Our view was “The U.S. Federal Reserve is still expected to begin hiking interest rates from its zero-bound level this year. But, how far can the Fed actually raise rates in a global environment of slow growth and deflationary concerns?  As the market figures out that Fed will stay behind the curve and do only little and keep real rates negative for much longer, gold should start moving northwards” (Click here to read). It has panned out almost exactly as seen in the sharp surge in prices following the first fed interest rate hike.

We suggest that this Akshaya Tritiya that one can participate and buy gold. Our macro view impacting gold markets is outlined below:

Uncertainty over global central bank policies is deepening. Investors seem to be concerned over eroding effectiveness or far reaching negative consequences of unconventional monetary experiments like quantitative easing programs and negative interest rate policies. Indiscriminate printing of currency seems to be the panacea for these banks, which may prove to be a Pandora’s box in the future.
Central banks globally are addicted to unconventional monetary policies. Global central banks have fewer options and have become less potent and effective in their ability to reach their current goals of boosting economic activity and inflation. In a desperate attempt to lift off demand, they have pulled the rabbit from their hats in form of negative rates. With about a quarter of the world economy facing negative rates in some form and growth faltering, negative rates are becoming commonplace. Suppressing interest rates doesn't work either; because all that happens is demand is made to shift from current to deferred consumption. Therefore this again will neither lift spending nor investments but has a potential to spark a rush to real assets like gold.

We maintain our view that real interest rates will probably stay low even if the Federal Reserve raises borrowing costs in response to higher inflation. However, the Fed will remain cautious as U.S. domestic growth and global growth continue to be sluggish. If the Fed gets more worried about declining growth & lower inflation and changes its stance by launching a renewed quantitative easing program (which is quite possible), it would be a significant boost to gold prices.

Gold prices have seen a rise in this year. Consolidation is normal and healthy after a move like we saw. Any improvement in risk sentiment may also reduce flows to gold. However, given the global macro, downsides in gold would be limited and likely to attract significant buying on any meaningful pullbacks. Fundamentally, gold seems to be on a solid footing as central bankers have again hit the wall. Gold should benefit as central bankers attempt further measures through more newer, unconventional and untested approaches to revive growth.

Having said that, we continue to believe that a positive view on gold is just an icing on the cake. The main reason to own gold is the sheer fact that it’s an extremely good portfolio diversifier. There is enough mathematical evidence to prove (as the table below does) that gold does help your portfolio in terms of improving returns and lowering risk giving enough substantiation of its usefulness and thereby deserving a place in your portfolio.

For simplicity purpose, we consider only two asset classes, Equities and Gold. For equities we consider investment in Sensex (without dividends) and for Gold it would be Gold prices denominated in Indian Rupees (without any taxes, duties and levies). We compare different portfolios that are yearly rebalanced: One with 100% equity and the others with varying proportions of gold allocation like 5% Gold and 95% Equities, 10% Gold and 90% Equities, 15% Gold and 85% Equities … etc

As seen in the table above, gold helps to reduce risk without sacrificing returns from your equity investments. The important point is such risk reduction enhancement for the portfolio has come without sacrificing the long term return potential.

Please study the above table carefully and it will help you decide how much you want to allocate to gold out of your total portfolio. The allocation would really depend on different factors like risk tolerance, other investments, cash flows / income, age profile, etc. However, generally speaking an allocation of 10-15% of your portfolio to gold may be a useful addition to your portfolio and thereby help you to improve the risk return profile of your overall portfolio.

As seen every year, there is bound to be a beeline of buyers geared up to buy gold this auspicious occasion.

Rather than paying high premiums and making charges this year, why not try something a little different from the comfort of your home?

Buy Gold ETFs listed on stock exchanges
· Price efficient vehicle

· Backed by physical gold

· Pure Gold – 0.995 fineness & above – categorized as 24 Karat

· No worries on storage and safe keeping

· Convenience

So don't lose more on prices, making charges, purity etc by buying physical gold, this Akshaya Tritiya, buy gold by investing in Gold ETF.

-Mr. Chirag Mehta,
Sr. Fund Manager-Alternative Investments,
Quantum AMC

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