May 10, 2011, 03.47 PM IST | Source: CNBC-TV18

Gold rush: Why do experts call it the best asset class?

Gold has been the asset class closest to the Indian investor's heart. It is not just the retail investor who is pouncing on gold ETFs, add banks corporate houses and institution and overall assets under management (AUM) has risen a whopping 54% over the last 6 months and why not?

Gold rush: Why do experts call it the best asset class?

Gold has been the asset class closest to the Indian investors heart.  It is not just the retail investor who is pouncing on gold ETFs, add banks corporate houses and institution and overall assets under management (AUM) has risen a whopping 54% over the last 6 months and why not? Gold ETFs have on average delivered returns of around 18% over a three year period strong demand has resulted in some fund houses launching blended funds which spread the investment over debt, equity and gold ETFs. And experts say this is just the beginning.

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In a CNBC-TV18s special show Informed Investor, Mitali Mukherjee speaks to Sunil Kashyap, MD, Scotia Mocatta, Naveen Mathur, Associate Director, Commodities & Currencies, Angel Broking and Swati Kulkarni, Fund Manager, UTI Gold Fund a bit more about gold, the various forms in which you can own it and why its important to have gold in your portfolio.

Here is the verbatim transcript of the interview. Also watch the accompanying videos.

Q: Gold is considered an asset class in its own. Why is that and how would you pit it both against the commodities and equities?

Mathur: Gold is one of the best of the asset classes to be invested in when treated as a safe haven demand. Now talking about safe haven demand I think it is more to do with geopolitical tensions across the globe, more to do with inflationary tendencies which built up in times to come or has happened in years gone by.

I think with no other asset classes performing very well after the sub-prime crisis in the US and the financial depression which we are seeing across the globe, the bullion pack has turned out to be one of the best of the asset classes. It is being proved by the returns which gold particularly has given in last consequent years; it has always been a positive return for gold.

Q: In terms of what it is that holds gold so firm, not just this year for the years gone by whether its on basis of it being a hedge whether its against interest rate, generally as a mechanism to sort of absorb your self against any volatility in global markets generally?

Kulkarni: One thing is sure that gold as an asset class has much lesser volatility and it also has much lower co-relation than any other asset classes. Now talking specifically about Indian investors psyche, we traditionally have been investing in gold and jewellery has been the major component. Next comes the investment demand for gold. What I feel is in the scenario which Naveen Mathur just described gold has been pursued as a safe haven and we have seen interest in gold coming back mainly on that reason and global liquidity and the low interest rates helped.

Q: There is another issue that makes gold stand out versus other commodities especially in this year where there was geo political risk. How does gold work as a mechanism against geo political risks?

Mathur: Gold has given positive returns versus the other asset classes> within the commodity space if we talk about the calendar year 2010 gold has given return of approximately 28-29% which is at par over the returns of other base metal classes like copper which has given kind of the same returns of 30%. So it didnt pan out largely beyond the certain space, better returns in the commodity space itself. But within that bullion pack I think you missed out silver.

Silver has given phenomenal returns around 80 or 90% of the returns in last year and this year too we have seen havoc happening on the prices of silver. So, I think as a bullion pack, overall not keeping just the gold in perspective both gold and silver in perspective looks to be a very positive stuff.

You asked me how it is going to be a safe haven stuff a kind of asset class. Because of the political tensions and inflationary tendency we have build up, gold acts as a kind of tool because of its low correlation with equity markets and with crude oil going up or the equity market margins and all that goes down and with this correlation gold prices going to be on the upside.

Talking about geopolitical tensions you dont take too much of risk on the other asset classes like equity, your risk appetite goes pretty down. And as Kulkarni said because of low risk appetite gold is pulling up the demand strongly and that is why the gold prices go up. So as a safe haven these tensions and no other asset classes or markets performing. At the same time with inflation building up and hedging against inflation, gold is bound to be one of the best asset classes.

Q: There is another very important factor for gold and that is something developed off late. It is about the role of central banks including our own Reserve Bank in buying gold and propping up the price as well. How much of an important factor is that you think.

Kashyap: Increasingly, that's an important factor because if you see the trend of central bank activity in gold, it gives an indication of where the gold price is going. So if you look at a 10-year history for example in the earlier part of the century you will see or actually last part of the century, last century. In late 1999 and 2000 you saw a lot of selling from central banks, some of the European central banks were selling, the Bank of England sold gold and that also mirrored the movement of the gold price, which went lower and lower and we saw a low price of USD 252 however, in the last 5 or 7 years we have seen increased buying by central banks and lesser selling and that has got reflected into the gold price, now turning around and going from that low of USD 254 all the way upto USD 1500 or so currently.

Q: The other thing that gold is very closely related to is the dollar. That is the most obvious connection between gold and US currency. How does the equation work and what do you make of where the dollar is right now and what that means for gold prices?

Kashyap: Traditionally the gold price has been inversely co-related to the US dollar. So what happens is as the dollar strengthens against other currencies, predominantly against the Euro or the Yen. What we find is gold starts falling or reducing in price and so there is an inverse co-relation. Recently, however, we have seen weakness in the US dollar. We have seen the gold price turning up and once again consolidating that inverse relationship. Going forward I think investors should keep an eye on exchange rates and the US dollar and expect a similar relationship.

Q: In the Indian context what is the most traditional form of owning gold? Do people still go towards physical gold in terms of owning or buying or has that investment spread out now, people looking more at Gold funds or Gold ETFs or some other form of playing Gold as an asset class?

Kulkarni: Basically still investors are looking at physical gold but today we have an efficient form of investing in gold which is Gold ETF . More investors are looking at this form because it gives you lot of safety, you dont have to pay locker fees or you dont have to worry about the theft in gold and also you dont have to be worried about quality. You get the purest quality of gold in paper form. The other important point here we have to note is as per World Gold Council estimates we have about 18000 tonnes of above ground gold in India and Gold ETFs though 22 tonnes might look very small portion of that.

Todays assets under management (AUM), under gold is equivalent to about 22 tonnes of Gold. You have to see this in perspective that more and more people are looking at Gold ETF as an asset class and this is seen in the fact that when we started this in 2007 as an industry, the assets under management were equivalent 3 tonnes of gold and they have grown seven times.

Q: How would you weigh gold versus silver against each other because for a lot of people silver doesnt have the fundamentals that gold holds?

Mathur: Absolutely right! I think gold and silver in spite of being in the bullion pack, behave differently. Even as far as returns are concerned, in the last calendar year, gold has given 29-30% return versus silver of around 85-90% return. This year, gold has given a marginal kind of return with silver. Gold perspective would be a risk free asset class in terms of commodity space. Silver on the other hand is not a risk free asset class among the bullion pack on commodities. Its a little speculative too; however, there is lot of money which flows into silver.

Q: How do the gold funds work versus the ETFs?

Kulkarni: Investor will have to look at the actual details of each fund but it is true that Gold ETF works like a gold share. As you buy shares, you can buy units on the stock exchange and it perfectly tracks the gold price movement.

But that may not be the case with the fund which has flexibility to invest in mining companies also because that funds NAV would also depend on what kind of profitability the mining companies have, what kind of prospects they have and change in the prospects, the volatility in those companies which I presume will be much higher than the gold volatility per se and thus, the composition changes.

There are schemes which have a combination of asset class like UTI, which has a wealth builder tool and which is investing equity with gold then there are a couple of other funds in industry which combine the debt asset plan, equity and gold. So, we have a lot of readymade options, where a fund manager may take a view on the gold and he can alter the asset allocation based on his view.

Q: Any taxation benefits that someone can get while investing in a gold fund similar to a mutual fund scheme?

Kulkarni: Gold fund has different tax implications. It is not treated as an equity fund. When it comes to capital gain tax, you have indexation benefit but otherwise it is more to do with the combination of asset or the basket getting widening because you have a variety of asset which you can participate.

Q:  One criticism that gold does not often face is something that its peers from the commodity space do which is of scams or speculations or overheating. So, on that count how would you pit gold against the asset classes of its own type? You also say that there may be elements of speculation while trading gold. Where do you think gold prices may be headed?

Kashyap: Gold is always susceptible to speculation because it is a unique asset which is both a physical asset which can be consumed for jewellery for example as well as financial asset. So for time to time, you could see short term movements being influenced by speculative buying or selling.

But I think the important fact for retail investors to look at is the medium term trend, which we see as quite stable for gold. Moreover, the important thing when an investor looks at gold is that it is a great asset diversification too.

Q: How easy gold trading is in India and how would you recommend going about it?

Mathur: The dynamics of trading in commodities, particularly in gold and silver and all these volatile commodities have changed. Earlier, during the marriage season or festival season in India, demand for silver and gold used to go up but the dynamics also go beyond that.

They are more to do with the global dynamics and understanding of the business that how it is happening across the globe. Currency factor is one of the major drivers, geo-political tensions across the globe or in any of the countries also lead to the change in supply and demand side of gold and at the same time you also have crude oil which one needs to track now because it leads to inflationary pressures and gold is a safest edge against the inflationary pressures.

Q: Where do you see gold headed as an asset class over the next 6 to 12 months?

Kulkarni: A lot of central banks are looking to put part of their reserves into gold as an asset class. US dollar is losing ground because of the recessionary trends and the lower-than-expected economic growth expected there. The central banks in developing countries are under invested in gold as a percentage of their reserves, it is less than 10% and the developed markets on the other hand are 15-16% so this is one important criteria which could support in the kind of difficult times we are going through be it political crisis or the European debt crisis or high inflationary expectations getting build up world over.
I feel that gold as an asset class definitely has a strong appeal and investor should look at putting about 10-20% of their portfolio into this asset class. Gold has clearly beaten inflation in various countries and that is what investor can expect.

Q: You will be more easily pinned down to price outlook so tell me where you see gold prices headed by the end of this year?

Mathur: With all the reasons like the loose monetary policy, the crude oil is spiraling up to USD 120-125 per barrel. With the kind of inflationary expectations building upon from there and the sovereign debt crisis which is still looming across the European nations, gold is looking to be positive. Talking about India, Rs 22,000 levels is the right stuff to be there on a fundamental side with little bit of push on the currency factor and the crude oil. I think Rs 24,000 or Rs 24,500 levels for 10 grams would be the right thing to talk about by the year end. For silver, there should be approximately 65,000 to 66,000 by this year end.

Q: Where you see global gold prices headed and how much more upside you expect to see on gold versus silver or base metals as well.

Kashyap: We have recently seen a decline in gold prices which is sort of mirrored an overall decline in commodities in the last two or three days. I think that is probably an opportunity for people to buy. There is going to be continued high deficit spending in western countries and that should help investors. We see gold consolidating from these levels and perhaps moving up before the end of the year.


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