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Hard Metal: Getting gold to glitter

Hard Metal: Getting gold to glitter
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First Published: Mon, Sep 24 2007. 12 54 AM IST

Updated: Mon, Sep 24 2007. 12 54 AM IST
Autumn is on its way and the festive season is nearly upon us. Tanu Bhatnagar, 26, an account manager in Radisson Hotel, New Delhi, has been setting aside some money every month to buy a gold necklace in a shop window that she passes by every day on her way to work.
“Every year, I buy something in gold for myself during Diwali because it’s a very auspicious time,” she says. Since she is driven by her quasi-religious belief to buy gold only during Diwali, even higher prices of the metal aren’t a deterrent. The sentiment only goes to suggest that Diwali and Eid, two big festivals in India towards the tailend of the year, are when gold consumption tends to witness a spike. The strong demand, in turn, drives up the price of gold. The alloy prices have rallied more than 12% since early July touching $739.30 (Rs29,498) an ounce (28.35gm) on Friday in London—the highest since January 1980.
“We expect the rally to continue further into the third quarter as the festive demand in India rises,” says Tarang Bhanushali, a research analyst at India Infoline Ltd, a Mumbai-based stock broking company.
Gold may reach $765 an ounce this week, James Moore, an analyst with London-based TheBullionDesk.com, said in an interview. What’s more, gold is expected to perform strongly in the current and third quarters, although prices may stabilize some, according to analysts.
India is the biggest consumer of gold in the world with an annual consumption of 700 tonnes. This year, because of higher demand and increased consumer spending, gold consumption levels are expected to go up further. “We don’t forecast demands or price, but if the current price levels and economic and political situations prevail for the balance of the year, we could be looking at imports in excess of 900 tonnes,” says Ajay Mitra, managing director for the Indian subcontinent with the World Gold Council (WGC), a global gold trade promotion body.
Given the increase in demand, analysts are upbeat on the metal. “In the next quarter, investors can expect 10% returns from their gold investments,” says Somnath Dey, head, metals and energy, Religare Commodities Ltd, a New Delhi-based broking house. “We have set a target of $740 per ounce on Nymex (New York Mercantile Exchange) for the next quarter.”
Gold is expected to remain bullish during the festival season, says Tejas Parikh, senior analyst, Motilal Oswal Commodities Broker Pvt. Ltd, a Mumbai-based broking house.
“We have set a target of $735 per ounce on the Nymex and Rs9,450 per 10gm on Multi Commodity Exchange of India Ltd (MCX) for the coming quarter,” he adds.
In comparison with other products such as copper and crude oil, gold has not seen a sharp rise in price until recently. “Considering the value-investing theory, a rally in gold is still to be seen,” says Shailendra Kumar, research commodities head, Sharekhan, a Mumbai-based broking house.
Currently, the yellow metal is trading at $731 per ounce after recovering from a two- month low of $640.
In the past one year, gold moved anywhere between $590 and $730.
Why invest in gold?
Price stability: Unlike equity and real estate markets, gold has always been considered a safer investment.
Its price does not fluctuate the way equity and real estate market do, and on the long haul, it tends to give you good returns. Over a period of five years, gold has given a return of 126%.
Gold is one of the best ways to diversify your portfolio.
Price volatility: It is another factor that influences the demand for gold. A WGC report says that demand fell sharply in the first half of 2006 when volatility spiked as high as 40%, before recovering gradually over the course of the year as prices became more stable. But this year, demand has gone up as volatility fell to 12% in dollar terms at the end of June, from 18% at the end of March. This explains the substantial jump in gold sales during Akshay Tritiya this year—an auspicious day in the Indian calendar.
Crude oil prices: Gold and crude oil prices move in tandem. Reason: Rise in crude oil prices leads to high inflation. Since gold has been considered a hedge against inflation, gold prices tend to go up on inflationary pressure. Analysts have a bullish outlook on crude oil as prices tend to go up during the end of the year, given the demand in winter and the possibility of hurricanes. Anticipated rise in crude could have a positive impact on gold.
Weak dollar: Traditionally, gold prices take an inverse direction to the US currency. Over the past five years, the US dollar has lost 35% against the euro but, during the same period, gold has appreciated by 100%.
This year, against a basket of six major currencies, the US dollar has fallen by almost 5.6% and experts continue to have a bearish outlook for the coming quarter. Experts say that the current liquidity crunch in the market, along with subprime fear, is a major concern for the dollar.
Past performance
Although the gold rally is not a recent phenomenon, the alloy’s journey historically has been marked by both dull and glittering days. Gold experienced bull markets in the 1970s. Its price rose spectacularly from $35 per ounce in 1971 to $200 per ounce in 1974. In 1980, the alloy moved northward to an all-time high of $886 per ounce.
The bull run in gold prices restarted in the year 2000 reaching $725 per ounce in May 2006.
An interesting fact is that during the 1980s, gold was available in the US for $850 per ounce, in India 10gm of gold was available for Rs1,500 in India. Currently on Nymex, while gold is available for $731 per ounce, in India it is available for Rs9,420 per 10gm.
This goes to suggest that the wealth of Indian investors, who invested in gold, has multiplied six times, while foreign investors have actually lost on their investments.
This year, gold already has surpassed the $725 per ounce level—the record high of previous year.
How to invest
Buying from banks: Buying gold bars and coins through banks is always good because it comes with tamper-proof packing. It assures you of the purity of gold.
Bankers also eagerly wait for the festival season because around 45% of the gold is sold during this time.
Disadvantages: The Reserve Bank of India (RBI) doesn’t allow banks to trade in gold. Banks only are authorized to sell gold and so they cannot buy it back from you.
So, at times, you may end up selling to the local store at a discount to the market price. Some banks, however, have arrangements with local shopkeepers to help them buy and sell gold. “Although we are not allowed to buy back gold from customers, we have tie-ups with jewellery shops,” says K.V.S. Manain, head, retail liabilities, Kotak Mahindra Bank. “These stores take the gold back from our customers at the market price.”
ETF
Exchange Traded Funds (ETFs) are the best way retail investors can participate in the gold rally. ETFs are funds that are listed on the exchange and can be traded just like other shares. Here, unlike mutual funds, you don’t need to pay entry and exit loads. You only have to pay brokerage fees the way you do while buying and selling shares.
In addition, you don’t need to keep a daily check on the way prices are moving because unlike trading in contracts, ETFs don’t have an expiration date.
To buy a gold ETF, however, you need to have a permanent account number (PAN) card and a demat account.
Currently, three fund houses sell gold ETFs—UTI Gold Exchange Traded Fund, Gold Benchmark Exchange Traded and Kotak Gold Exchange Traded Fund.
In the past one month, the three funds have given an average return of 7%. DSP Merrill Lynch World Gold Fund, which was launched recently, invests in its parent Merrill Lynch International Investment Funds, which, in turn, invests predominantly in gold mining companies around the world.
Disadvantages: The only drawback is that you don’t get physical possession. In addition, you need to have a demat account and a PAN card for buying gold ETFs.
Jewellery
Jewellery is bought in India for the dual purpose of adornment and investment. According to a WGC report, consumer demand for gold this year was especially vibrant in India and mainland China, where it rose by 50% and 31% year-on-year. Wealth managers don’t consider jewellery a good investment considering the large amount of money that is spent in its designing.
Jewellery accounts for 70% of gold consumption in India. Despite its size, the sector doesn’t influence prices—investment is the price driver for the industry.
Disadvantages: Does not have good resale value.
Futures
Futures are meant for wealthy investors. Although you are not required to pay the whole amount upfront, given the risk involved, futures trading is not a good bet for retail investors. Futures contracts specify that the underlying index, currency, or commodity will be bought or sold for a specific price on a specific date in the future (known as the expiration date).
One contract of gold on MCX is for 1kg, which can cost you around Rs9.5 lakh. You need to pay a margin of 5%, which is around Rs50,000, to buy 1kg of gold.
However, this is not as easy as it sounds because you need to keep a track of daily prices.
“You can both buy (long) and sell (short) gold futures on MCX,” says D.K. Aggarwal, director, smc, a New Delhi-based investment solutions and services provider. “And by paying the brokerage amount, you can even roll it over to the next month. You need to, however, keep a track of daily gold prices to square it off at the right time.”
India’s gold futures fell on 20 September even though the overseas markets rose because the rupee strengthened against the dollar to Rs39.9 as of this past weekend.
Disadvantages: Risk proportion of futures trading is pretty high. If you are in it, you need to keep a daily track of price movement in the market.
Write to us at businessoflife@livemint.com
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First Published: Mon, Sep 24 2007. 12 54 AM IST