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Posted On Monday, Mar 15, 2010
Recently the price of gold seems to be under pressure, showing a decline accompanied by high volatility. Two major reasons have been cited for this downward trend:
However, the above factors should have a short term effect and the resultant weakness should be bought into.
Let us discuss the above mentioned factors in detail:
Recent issues regarding mounting debt and higher deficits in many countries in the Euro Zone have led to a fall in the Euro currency vis-à-vis the U.S dollar. But, the fact remains, that the U.S economy is no different and is in a debt league of its own with rising deficits and increasing total debt. Hence, only because the sovereign debt issues of Greece have been highlighted, the dollar has seen appreciation, with many falsely citing it as a "safe haven" currency.
Going ahead, the high amounts of debt in the U.S will have to be monetized, and this may result in a devaluation of the dollar. Since the dollar is appreciating only due to the weakness in its alternative counterparts, its current strengthening should be only for the short term.
IMF recently announced that it would soon initiate the on-market phase of its gold sales program. This plan to sell 403.3 tonnes of gold has been well known by the market and debated by the media for many months now. Also, we are aware of the RBI buying almost half of the gold for sale followed by further purchases from Sri Lanka and Mauritius. Prior to the current announcement, 212 tonnes of this gold had already been sold to central banks, leaving a balance of 191.3 tonnes. (Source: IMF)
The next phase is about selling this 191-tonne balance in the open market in a way that minimises disruption, which probably means that the sales will be spread over time. However, as stated by the press release by IMF, this does not preclude further off-market gold sales directly to interested central banks or other official holders.
It is important to understand that such gold sales declarations by IMF or any other central bank can be expected to cause short lived psychological reactions as it initially gives an impression of more gold in the market. However, when we put it in perspective and analyse the impact, it appears very insignificant when compared to the overall size of the market.
The relative insignificance of the proposed on market gold sale immediately becomes apparent once it is realised that 191 tonnes is less than 0.2% (one fifth of one percent) of the total above-ground gold supply. Also, developed world central banks used to sell gold onto the open market under the umbrella of "Central bank gold agreement" and that too of a much higher quantum than that proposed by IMF. Average Central bank gold sales since 2000 to 2009 have been 444 tonnes per annum. (Source: World Gold Council)
An average of 650 tonnes of physical gold changes hands via the London Bullion Market Association (LBMA) every day. In other words, the total amount of the IMF`s currently-planned sale equates to only a few hours of LBMA trading. (Source: LBMA)
The biggest gold ETF in the world, SPDR gold trust holds more than 1100 tonnes of gold. All the gold ETFs combined hold more than 1700 tonnes of gold. (Source: World Gold Council)
As seen above, the proposed sale by IMF looks very insignificant to cause any meaningful change in the long term outlook of gold. This is obviously not something that needs to be factored into our assessment of the gold market`s prospects, provided that we are concerned with meaningful trends rather than short term gyrations caused by first reactions to any perceived negative news.
Even earlier, when IMF had announced its intention of gold sales it caused a similar knee jerk reaction and prices saw a decline for a very brief period. But, on RBI’s announcement of the purchase of 200 tonnes of the IMF gold, it led to a much larger upward reaction. Still, the possibility of the gold being purchased by central banks like China, India, Russia remains a high probability event and this time reactions to such announcements can lead to more bullish reactions than we saw after RBIs purchase. In addition, it could be argued that the more gold the official sector sells the less stable the monetary system and therefore, the more solidly underpinned the gold bull market becomes.
This correction in gold prices serves as an ideal opportunity to purchase gold from a long term perspective.
One of the best options to invest in Gold is the Quantum Gold Fund.
Click here to invest in the Quantum Gold Fund ETF
The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.
Investment Objective: Quantum Gold Fund`s (QGF) investment objective is to generate returns that are in line with the performance of gold, subject to tracking errors. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities, but may invest in money market instruments to meet liquidity needs. Terms of Issue: QGF is an open-ended Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed. Entry Load: Nil Exit Load: In case of QGF: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: QGF is the first gold scheme being launched by the AMC. The AMC has no previous experience in managing gold scheme. The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF. It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to marker risks. Please read the Scheme Information Document / Key Information Memorandum / Statement of Additional Information / Addenda carefully before investing. Scheme Information Documents /Key Information Memorandums/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com
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