A quick analysis of the key factors that led to a decline in gold prices although the physical demand and supply dynamics remain robust point to the aftermath of the financial crisis in 2008- 2009.
An insight into the causes for the rise and fall in gold prices and the ETF options for retail investors. For decades, gold is considered as an alternate asset class to traditional forms of investment, in addition to being a store of value, hedge against rising inflation, safe haven asset and for some an asset that can convert to cash anytime.
However, in recent years, the precious metal has underperformed the other asset classes categorised as equities and bonds. Gold peaked to about ₹34,000/ 10 grams in 2013, but prices of the precious metal have plunged since then and is currently hovering around ₹29,000, a drop of about 15 percent from the all- time highs.
A quick analysis of the key factors that led to a decline in gold prices although the physical demand and supply dynamics remain robust point to the aftermath of the global financial crisis in 2008- 2009.
At the peak of the crisis, central banks in almost all developed economies started buying assets backed by securities from private financial institutions to pump in liquidity into the financial system which was on the verge of a collapse due to the massive job losses, leading to large- scale loan defaults.
The “European Central Bank” went a step further by purchasing government securities of countries within the euro- zone like Greece, Spain, Portugal and a few others to prevent them from defaulting on sovereign or government debt.
In addition, the central banks starting cutting interest rates rapidly, forcing investors to look for alternate safe havens to invest in. This led to a massive rally in gold prices; from ₹10,600 at the start of 2008 to ₹16,700 by the end of 2009, literally outperforming all other asset classes with prices surging close to 60 percent in 2- years
The monetary policies of the global Central Banks were successful in easing the cash crunch but as inflation and interest rates continue to fall, the most suitable investment option was the equity markets which by then had crashed about 40- 50 percent from the peaks.
With corporate financials looking attractive, investors gradually exited from gold and started investing in equities, driving the stock markets higher and pushing gold lower.
Historically, gold and equities are negatively correlated instruments and very rarely move in tandem.
Households in India invest in gold by purchasing physical gold in the form of jewellery and coins with a few well off individuals going to the extent of investing in gold bars.
However, the other way to go about investing in gold which not many are still very familiar with is the ETF route. Gold Exchange traded funds or ETF’s are typically open- ended, passively managed funds that closely track the prices of gold in the Indian markets.
These funds give investors the opportunity to invest in gold of any quantity starting with 1 gram and hold them in demat or electronic form without the hassles of securing them in safe deposit lockers with banks.
The price quoted by the gold ETF is termed the “Net Asset Value” or NAV which is generally equal to the price of 1 gram of gold and a small fee charged by the asset- management company.
The NAV rises or declines in line with gold prices and investors are free to exit or sell their investments anytime, in a highly liquid market.
For investors who are not familiar with the terms mutual fund, schemes, fees and so on, purchasing a gold ETF is similar to buying shares of listed companies.
All that is required is to open a demat account with a broker or bank to facilitate the transfer of these ETF’s.
There are a number of mutual funds offering gold ETF’s with some of them even giving investors the option to take physical delivery of the precious metal.
With stock markets near the peaks, uncertainty in the global economic and geo- political arena, inflation edging higher, interest rates falling and Gold prices have found their footing, investing in these ETF’s with a long- term perspective could provide the perfect setting for gold savvy investors.Disclaimer: The author is co-founder & Head of trading, Zerodha. The views and investment tips expressed by the investment expert on Moneycontrol are his own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.