Festive fervour rubs off on gold ETFs too

Weigh your investment needs before buying gold
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First Published: Wed, Oct 24 2012. 07 39 PM IST
Anirban Bora/Mint
Anirban Bora/Mint
Updated: Thu, Oct 25 2012. 10 19 AM IST
The noise around gold rises during the festival season. Gold, traditionally a consumption asset, has seen an increase in investment demand. Globally, the jewellery demand was 2,662 tonnes in 2002, it fell to 2,017 tonnes in 2010; demand for gold bars and coins was 353 tonnes and went up to 1,210 tonnes in 2010 and additionally 368 tonnes of demand was accounted for by gold exchange-traded funds (ETFs), according to World Gold Council. This shows two things: firstly, some amount of the jewellery demand has shifted to investment in the form of bars and coins and exchange-traded funds, or ETFs, and secondly, there is new demand for gold mostly in the form of investment. Gradually, festive demand is also flowing into pure investment instruments such as gold ETFs.
ETFs in festive mode
In India, investing in ETFs gets impacted by festive fervour. Gold ETFs which didn’t exist around five years ago now boast of just over Rs.11,000 crore in assets under management (AUM); every financial year there is a definite spike in gold ETF inflows in festive months of April-May (Akshaya Trithiya) and August to November. While in the initial years, spikes were seen in specific months around the festive season, gradually the demand has become more dispersed. In 2010 and 2011, around 50% of net inflows for ETFs came between August and November. So far this year, demand in gold ETFs has been pretty lacklustre, but in September it spiked to Rs.332 crore compared with a net outflow of Rs.35 crore in the rest of FY13 so far.
Changing dynamics
Before you get taken in by festive promotion of gold and jump in to buy ETFs, here are some important things you need to keep in mind. The volatility in global financial markets has given a boost to gold prices as investors flock to the precious metal to hedge against global economic risk and inflation. Thanks to this phenomenon, international price of gold has risen at a compounded annual growth rate (CAGR) of 23.5% in the last four years since the sub-prime crisis. This year the gold rally has taken a break as international prices have risen only 3.3%. But in India, where nearly all the gold we consume is imported, prices also get impacted by currency rate. As the Indian rupee depreciated 7.26% in the last one year, imported price of gold was elevated; domestic gold price rose 15% in the same period. Globally, the rally in gold prices has tempered. In India, the story is a bit different because of exchange rate dynamics. Now, depending on how things play out, gold prices will be impacted if sharp currency downtrend continues, if not then prices here too will get more in line with international prices.
In a bid to discourage household savings from being locked into a non-income generating and non-productive asset such as gold, duty on the metal has been increased, adding to the cost of domestic gold. There may be other measures in store to discourage investing in gold as the finance ministry has expressed concern on the matter.
What should you do?
Key is to separate investment from your emotional, religious and traditional need for gold. Suresh Sadagopan, a Mumbai-based financial planner, says that’s easier said than done. “Clients don’t come to us for gold purchases during this time because they know as financial planners we will favour investment rationale rather than sentimental value,” he says. As an investment gold neither gives interest nor dividend and in that sense is a non-productive asset. After increasing at a CAGR of around 19% in the last 10 years, international gold prices have become a little sticky with the two-year CAGR return falling to around 13%. So, only add gold to your investment portfolio in small proportion and planners rightly suggest limiting exposure to around 10-15% of your portfolio.
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First Published: Wed, Oct 24 2012. 07 39 PM IST
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