After six years of dismal returns, gold mutual fund schemes staged a solid comeback in 2019. Of the 351 equity funds in the Rs 26 trillion Indian mutual fund industry, the two top-performing equity funds were gold schemes. Kotak World Gold and DSP World Gold topped the chart with 41 per cent and 37 per cent returns, respectively. These funds are international schemes and they invest in the equity shares of overseas gold mining companies. So, here is a glance back at all that happened with the yellow metal this year.
Why did gold prices rise?
The year started with the continuation in the trade tensions between the US and China. The first phase of the trade deal did not go through. Trade wars between other countries, Brexit and geo-political tensions also kept investors worried about rising uncertainty, thus benefitting gold prices. “Global uncertainty and US-China trade tensions kept the gold prices well bid in CY2019,” said Devendra Nevgi, founder and principal partner of Delta Global Partners. The spot price of gold in Mumbai traded at Rs 38270 per 10 gram for 24K gold on December 6, 2019 , compared to Rs 31750 recorded on December 31, 2018 – a 20.5 per cent rise. A weak US Dollar also worked out in favour of gold prices. Over the year, the Indian rupee fell vis-à-vis the dollar.
Central Bankers across the world kept buying gold, underlining the possibility of tough times in the near future. In the first three quarters, they bought 547 tonnes of gold, which was 12 per cent more than in the previous year. Nevgi expects gold prices to remain strong in the near future.
Structurally too, gold is expected to move up. “We are at the cusp of a regime change where a failed monetary policy will be replaced by an expanding fiscal policy in the form of rising government deficits accommodated by obliging central banks. This is a dangerous mix and gold has already sensed that,” says Ritesh Jain, formerly a fund manager and now a blogger at worldoutofwhack.com.
Globally, an unprecedented printing of money has taken place and it has failed to lift economic growth. This has led to government intervention in the form of fiscal measures such as tax breaks and increased expenditure. Such moves will make investors load up on gold.
The stage was set for the gold rally even before the beginning of 2019. Despite an upward move in gold prices, there was not much investor interest seen in gold exchange traded funds. If you keep aside net inflows in the month of August (Rs 145 crore) and September 2019 (Rs 44 crore), each month the gold ETFs saw net outflows. “Demand for gold is going down, which is reflected in the fall in imports by India when the gold prices went up. Investors also expect the US dollar to remain strong, which means gold prices will remain weak. These could be the reasons why we have not seen much investments in gold ETFs,” said Joydeep Sen, founder of Mumbai based wiseinvestor.in.
Rising gold prices in the domestic market made jewellery purchases expensive. To add to buyers’ woes, the import duty on gold was increased to 12.5 per cent from 10 per cent in July. This rise in import duty was passed on to gold buyers.
Gold schemes deliver shock
If this weren’t enough, gold buyers faced one more shock with the Goodwin Jewellers debacle. A couple of days before Diwali, the jeweller shut its outlets in the Mumbai metropolitan region, leaving hundreds of investors in its gold schemes in a lurch. They had invested in fixed deposits floated by the beleaguered jeweller and the gold purchase scheme, which offered attractive yields.
On November 29, the government announced that the hallmarking of gold jewellery will become mandatory from January 15, 2020. However, the government allowed a year’s window to comply with the norm. Mandatory hallmarking will protect consumers’ interest by endorsing the quality of gold ornaments, experts say.
Bonds make a slow come back
Bond investors had an eventful year. One key aspect witnessed was the Reserve Bank of India’s (RBI’s) attempt at reviving the economy through rate cuts. The RBI cut the repo rate by 135 basis points to 5.15 per cent by October 4, 2019. The rate stood at 6.5 per cent last year.
The benchmark 10-year G-Sec’s yield moved to 6.58 per cent on December 5, 2019 from 7.37 per cent on December 31, 2018. In a first, state-run banking behemoth, State Bank of India, linked the interest rates payable on savings bank accounts balances above Rs 1 lakh to 2.75 percentage points below the repo rate or 3 per cent, whichever is higher.
The cuts in policy rates benefitted investors holding long-term bonds. “High networth individual investors holding long-term tax-free bonds have locked into the high tax-free coupons. These bonds saw capital gains, as the prices surged on the exchanges. Given the ample liquidity in these bonds, it is easy for the investors to book profits with handsome capital gains,” says Ajay Manglunia, managing director and head institutional fixed income, JM Financial.
Though interest rates declined, small-saving schemes remained largely unaffected. The rates in these schemes were cut on June 28, 2019 by 10 basis points only. It brought down the interest rate payable on the National Saving Certificate and Public Provident Fund to 7.9 per cent. “The Government has kept the rates unchanged to attract more savings in these schemes. However, in future, the rates will be brought down by 25 to 50 basis points over a period of time, to ensure effective transmission of rate cuts announced by the RBI,” Manglunia’s opines.
The launch of the Bharat Bond ETF will allow public sector undertakings to raise money at minimal cost. This comes at a time when government borrowings are expected to rise, given the possibility of a high fiscal deficit.
Non-banking finance companies continued to experience tight liquidity. “After the debacle of Infrastructure Leasing & Financial Services (IL&FS) in 2018, the magnitude of defaults increased as names with good credit ratings joined the list of defaulters. This spooked bond investors’ sentiment further,” says Vikram Dalal, founder and managing director, Synergee Capital Services.
The Fraud at the Punjab Maharashtra Co-operative Bank and the resultant restrictions announced by the RBI in September 2019 made the situation worse.
Fresh issuance of the AA-rated non-convertible debentures (NCD) continued in CY2019. Investor sentiment was weak. Things, however, are expected to improve. “Investors’ confidence is coming back, especially in the second half of the CY2019. In future, as and when interest rates are further reduced, investors are more likely to tap NCD issuances of well-managed and less-leveraged NBFCs,” says Manglunia.