Posted On Monday, May 06, 2019
Let’s just take a minute to admire how beautiful and unchangeable gold is. No matter what, it retains its shape and characteristics, but more importantly it preserves its value over the long term. In words of Peter A. Burshre "Regardless of the dollar price involved, one ounce of gold would purchase a good-quality man's suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today."
In a world where almost everything – technologies, businesses, markets, and asset classes are so dynamic, transient and continuously changing, this is a rare and admirable quality.
No wonder this imperishable and non-diminishing asset is synonymous with Akshaya Tritiya, a day meant to mark unending prosperity and wealth in Indian culture. Yes we Indians love gold, on days symbolized to buying something invaluable, we always turn to gold.
But it’s time now that we evolve from being amateur gold consumers to intelligent gold investors.
Though we suggest a strategic and staggered purchasing approach to gold in order to enjoy lower average costs, and diversifying your portfolio with at least 10% allocation to gold at all times, gold buying times like Akshaya Tritiya often confront us with a question – should it be a token purchase or can I buy more towards building my allocation?
This Akshaya Tritiya seems like a good time to load up your purchase as the risk reward dynamics favor the same. The macro economic backdrop seems more favorable for gold and downside seems limited.
2018 was the first time central banks tried to remove some liquidity from the markets after a decade of stimulus. Central banks have tried to get out of this low-interest-rate trap but they aren’t able to. The market is addicted to cheap liquidity and doesn’t look like that is going to change anytime soon. The world continues to remain in a state of great disequilibrium, both with respect to the global economy and geopolitics as well. Such a scenario should be constructive for gold in the medium to long term.
However, gold gains so far have been limited by strength in the dollar and rising risk appetite diverting flows towards equities from the likes of gold.
The U.S economic momentum earlier fueled by stimulus, tax cuts and cheap liquidity is clearly facing headwinds. The U.S. economy isn't doing great but that has not stopped the dollar from gaining value. The market's appetite for U.S. dollars is driven by a few factors, mainly the relative performance of its economy, equity markets, bond yields and most importantly, growth abroad. While U.S. interest rates are falling, the real yield differential moved in favor of the dollar because the economic outlook for the rest of the world is even worse. Buoyant U.S equity markets have been attracting significant flows, thereby further supporting the dollar. With rate hikes off the table, the slowdown in earnings growth may soon start reflecting in equity markets, alleviating another support for the dollar.
If the Fed takes a u-turn in policy as a response to slowing growth, lower inflation or falling asset prices by beginning to cut rates or adopt further unconventional measures like QE, it will be perceived by the markets that the central banks are caught in a trap and will not be able to normalize monetary policy. This will be a big boost for gold prices. With POTUS directly and indirectly stepping up pressure on the central bank to cut rates, with the backdrop of muted economic momentum, this policy u-turn is a matter of when, not if.
The price of gold and the strength of the dollar have a pretty clear inverse relationship. There has been a constant deterioration in the quality of the dollar as a reserve currency due to historic debt levels and Fed’s unorthodox monetary policies . In a scenario where other major currencies like the Euro and Yen are plagued with problems of their own, no currency is in a state to dethrone the dollar on immediate basis. Countries want to put an end to the dominance of US, and have thus entered into non-dollar bilateral agreements, thus we see a reduction in dollar’s share in international payments. Recognizing that the rules of the international monetary system are changing, the relevance of gold is increasingly rising.
In line with the comments from leaders of the two nations, the US –China trade deal seems a given and is priced in by the markets. However, that doesn’t mark an end to Trump trade wars. While one seems settling, other is brewing. EU said it’s preparing retaliatory tariffs against the U.S. over subsidies to Boeing Co., significantly escalating transatlantic trade tensions. The threat of new European retaliatory tariffs comes hours after Washington vowed to hit the EU with duties over its support for Airbus. While Trump threatens tariffs on various EU products including the probability of it extended to car and car part imports which could be a big blow for Europe. An intensification of the EU-U.S. trade war could soon be impacting global markets. These developments should undermine confidence and investments in risky assets, thus pushing up demand for gold
World leaders, the IMF and central bank chiefs across the globe are all of a sudden echoing slower growth. Just the end of QE on a global basis has pushed the financial world over a cliff. Increase in interest rates, lower liquidity and trade wars are leading to economic adjustments that the world is nowhere prepared for. Use and abuse of unconventional monetary tools by central banks have led to extreme economic conditions being the new normal. This ill-conceived and unsustainable policy making will be a big boost for gold prices in the medium to long term. This is because gold has traditionally been a major beneficiary of crumbling faith in the monetary authority due to its inverse relationship with paper assets like stocks and currencies, something which we don’t see changing.
Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby help you to reduce overall portfolio risk.
To make the move from consumer to investor, it is imperative now for us to move beyond our obsession with physical gold. Physical gold has been erroneously viewed as an ideal investment avenue for years, mostly because of its deep cultural and religious roots.
This inefficient preference for holding physical gold has prevented the investor from optimizing his gold investments. Not only do you end up paying a high price for this obsession, but it is also prone to a number of risks, most importantly the purity risk.
At the retail level, gold is primarily bought for 2 reasons: Adornment and Investment. Both are very distinct needs, and consumers will benefit to realize that they are best met by different forms of gold. Physical gold like jewelry, coins and bars are best suited for adornment and gifting i.e. self-consumption, while financial forms like gold ETFs are a preferable avenue for investment.
Gold ETFs are mutual fund units that aim to generate returns in line with the returns of physical gold. Gold ETFs are traded on the NSE and BSE. They offer investors a means of participating in the gold market, without taking physical delivery of gold. Gold ETFs even though a financial form, are very real as each and every ETF unit is backed by 24 carat physical gold held in secure vaults.
|Physical Gold||Gold ETF|
|Pricing||High premiums and making charges Not uniform, Prices may vary across the country and across jewelers,||Follows international prices (Wholesale Prices) and you get the same price for your gold ETF across India|
|Liquidity||Liquid, buying and selling price varies significantly due to making charges||Liquid through Demat account, thin difference between buying and selling price|
|Safety||Susceptible to theft||Safe because they are in electronic form, no locker charges|
|Purity||Prone to impurities||24 Carat (995 purity)|
|Ease of transacting||Physical gold can be purchased from banks and jewelers, but can be only exchanged through jewelers||Gold ETFs can be sold anytime through your broker at transparent prices available on the exchanges|
|Physical delivery||Yes||Yes (in wholesale quantities like 1 Kg and multiple possible)|
|Minimum investment||10 gms||As low as 1/2 gm|
|Name of the Scheme & Primary Benchmark||This product is suitable for investors who are seeking*||Risk-o-meter of Scheme|
|Quantum Gold Fund ETF |
(An Open Ended Scheme Replicating / Tracking Gold)
|• Long term returns |
• Investments in physical gold
Investors understand that their principal will be at Moderately High Risk<
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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