Gold has broken the USD 1,100 barrier, and many chartists and technical analysts now believe that its momentum at present looks unstoppable.

The purchase of 200 tons by the Reserve Bank of India - a respected and conservative central bank - has only contributed towards lifting this sentiment. The price of gold gained nearly $70 since the announcement in early November.

With fundamentals (mainly the printing of money by central banks and government deficits) still favorable for a long term uptrend to prevail, investors may be rushing to make their allocations.

For the Indian investor, the appreciating rupee has taken some sheen off the returns from an investment in the yellow metal.

In 2009, the price of gold has increased by nearly 30% denominated in dollar terms whereas for the Indian investors it has been "only" 24%. Also, when measured in Euro, the appreciation has been "only" 22%. This is because while gold is priced in US Dollars, the returns that we calculate are based on our "home" currency. And cross-currency rates (how many INR can be bought by one USD) also fluctuate.

Over the past few months, we have seen the dollar depreciate vis-à-vis most of the global currencies. This means that currencies like the Indian Rupee and the Euro have gained in value; they have appreciated against the US Dollar.

As gold is traded internationally in dollars, any increase in the value of the rupee will push down the rupee price of gold. Simply put, the appreciation in the rupee against the dollar has eroded some of the appreciation in Indian gold prices - Since the beginning of the year, gold has gained by 30% internationally (in dollars). During the same period, the rupee has gained close to 6 % against the dollar.

Table 1: Gold goes up, but a strong rupee removes some of the gain (2009)

Change in Price of gold in US Dollars	+ 30%
Loss in value of US Dollar against the Indian Rupee	- 6%
Net change in the price of gold when measured in Indian Rupees for an India-based investor	+ 24%

Source: Bloomberg, QAMC calculations

As can be seen in Table 1 above, the rupee’s appreciation is capping the upside in gold prices.

Chart I: Comparative Gold Prices in USD, Indian Rupee, and Euro

Source: Bloomberg

Should this deter investors from investing in Gold?

Let us first look at the fundamentals of the rupee.

There are 2 reasons for the appreciation in Indian Rupee:
First, as the dollar depreciates vis-à-vis most of the global currencies, it does so against the INR. Exponential increase in U.S monetary base to support various stimulus measures and rising deficits is resulting in perceived weakness for the greenback.

Secondly, the ‘India story’ is drumming up a lot of followers internationally. Foreign fund houses are eager to be a part of this growth story, especially when the developed economies are faltering in their growth, and thus are bringing dollars to India to invest. YTD net inflows from FIIs in India have been more than $15 bn.

This increased money flows and perceived weakness in the dollar is leading to an appreciation in the Indian Currency.

Will this trend continue?

We saw the rupee depreciate to more than Rs. 52 / dollar during the peak of the crisis.
Since then, the expectations of growth which transformed to bullishness in the stock markets led to a rapid appreciation in the rupee to current 46/47 levels. The rupee appreciated by almost 10% as FIIs poured in money.

Well, if the dollar maintains its decline and the foreign flows continue in India, the rupee is bound to appreciate further.

Chart II: FII flows and INR

Source: Bloomberg

But, the magnitude of appreciation is likely to be much lower from here on.

India is dependent on imports for many of its important needs like Crude Oil, capital machinery, defence equipments, technology, etc. With the expected growth trajectory, we would import more of these and the import bill will continue to climb.

Also, India is a developing nation. There are still scores of people living below the poverty line and therefore the government will have to keep spending huge amounts to help them survive. There will undoubtedly be a lot of expenditure towards infrastructure, education, agriculture, defence etc by the government for developing our country. This high expenditure vis-à-vis relatively lower income from taxes and duties will result in higher fiscal deficits at the federal level which would weaken the Indian currency.

What History Indicates?

Over the long term, gold prices in INR have appreciated by a significant difference than it did in dollar term (see chart III). Since 1973, gold price in Indian rupees have increased by more than 13.16% CAGR whereas gold prices in dollars have increased only by 7.84%. Much of the increase has been on account of the rupee depreciation. A return of 13% over the last 36 years is simply incredible.

Chart III: Gold in India shines more

Source: Bloomberg (* as on October 2009)

Would you want to lose out on an asset that has delivered reasonably good returns over the long term?
Also, gold is an asset that tends to protect your purchasing power and acts as a store of value, and tends to be a hedge against uncertainty and crisis.

Do you want to take a chance and not be in gold just because of the small appreciation in the rupee? Don’t get carried away by the short term, instead keep in mind the long term potential and likely probability of both Gold and the Indian rupee.

Dollar depreciation or rather debasement of fiat currencies by policy makers, longer term inflationary concerns and increasing diversification of reserves and investments into gold will see gold prices reach significantly higher.

The RBI bought gold from the IMF.

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Disclaimer:

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