Gold: A knight in shining armour amidst global economic gloom Thursday, Aug 22, 2019
With gold prices on the rise, we are seeing a renewed interest in the shiny metal. We are being asked whether it’s a good time to invest in it. What is our response? Well, it is always a good time to invest in gold, but now even more! Let’s understand why.
Most of us understand saving for a rainy day. And we do so prudently through stocks, bonds and bank deposits. But all these investment avenues have an underlying currency risk. We’re asking you to counterbalance this currency risk with gold, and we have good reason for the same:
1. We are seeing rising economic nationalism all over the world in the form of protectionism, trade wars, America First, Brexit, anti-immigration movements etc. This global resurgence of economic nationalism is challenging the current economic system, making gold attractive.
2. The value of the US dollar is based on unlimited debt creation and money printing. The U.S. national debt exceeded $22 trillion in February 2019, a major increase compared to $12 trillion a decade back. Simply printing more and more money to repay its debts could lead to significant fall in value for the dollar, accompanied with global loss of confidence in the currency. This could have catastrophic consequences in financial markets all over the world and deal a major blow to its creditors, throwing the world into economic disarray.Other major currencies like the Euro and Yen are plagued with problems of their own, and thus no currency is in a state to replace the dollar on an immediate basis. Preserving its status as a payment instrument in world economy, gold reduces dependence on fiat currencies and could thus become an asset of choice.
3. Central banks have been strategically bolstering their gold reserves and reducing their reliance on the US dollar as a reserve asset. This central bank diversification away from the dollar is indicative of a potential shift in the international monetary system which bodes well for gold.
4. We are seeing more and more non-dollar trade agreements by Russia, Turkey, Iran to counter threat of US sanctions and dollar dominance. We may thus see the international monetary system moving towards a multicurrency system soon. Any such shift can be both de-stabilizing and dollar negative, which in turn would be positive for Gold.
In addition to these systemic issues, price of gold is expected to rise as a result of the low-growth disinflationary environment exacerbated by trade war uncertainty. The Federal Reserve will be biased towards supporting growth and therefore cut rates which will mean that real interest rates will be on a decline. This scenario will be positive for gold.
But irrespective of the state of things in the world, there are four qualities that make gold not only a valuable tactical asset, but also a strategic asset to hold at all times:
• A source of long term return
• Low correlation to major asset classes in both expansionary and recessionary periods
• A mainstream asset that is as liquid as other financial securities
• Potential to generate higher risk-adjusted returns
The presence of this strategic asset to the tune of 5 to 10% in a portfolio can’t be asserted enough. So let’s get you started. We’ve explored the various avenues to invest in gold with their benefits and drawbacks outlined below:
|Physical Gold||Gold ETF||Sovereign Gold bond|
|Pricing||Not uniform, Prices may vary across the country and across jewelers, high premiums and making charges||Follows international prices and you get the same price for your gold ETF across India. No high premiums or making charges||Your investment will be redeemed at prevailing domestic price of gold|
|Liquidity||Liquid, buying and selling price varies significantly due to making / melting charges||Liquid through Demat account, thin difference between buying and selling price||8 year tenure with an exit option from 5th year onwards Trades on exchanges but usually quotes at a discount to gold prices|
|Safety||Susceptible to theft||Safe because they are in electronic form, no locker charges||Safe because they are in electronic or paper form, no locker charges|
|Purity||Prone to impurities||Guaranteed 99.5 % purity||No physical gold backing but the price is benchmarked to pure gold|
|Costs||Storage, insurance, transportation, making charges, premium||Brokerage and managements fees|
No making charges, or premiums,
|No management fees|
No making charges, premium, insurance or storage costs
|Taxation||LTCG at 20% with indexation after 3 years of holding, attracts wealth tax||LTCG at 20% with indexation after 3 years of holding, no wealth tax||Interest on the Bonds will be taxable.|
The capital gains tax arising on redemption of SGB to an individual has been exempted.
The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond
|Ease of transacting||Physical gold can be purchased from banks and jewelers, but can be only exchanged through jewelers / scrap merchants||Gold ETFs can be sold anytime through your broker at transparent gold linked prices available on the exchanges||Bonds are only tradable among their tranches of issuance, thus limiting liquidity and usually trade at a discount|
|Physical delivery||Yes||Yes above a threshold quantity||No|
|Minimum/ Maximum investment||10 gms||As low as 1/2 gm||Minimum 1 gm|
Maximum 4 kg per individual per fiscal year
|Demat account||Not required||Required||Required for trading on stock exchanges|
|Interest payment||No interest||Investments in ETFs are not eligible to earn interest every year||Investments in this scheme are eligible to earn interest every year, payable every six months|
To summarize, the inefficient preference for holding physical gold has prevented investors from optimizing their gold investments. Not only do you end up paying a high price for this obsession (in the form of storage, insurance, transportation, making charges, high premium), but it is also prone to impurities and theft.
Financial forms like gold ETFs are preferable avenues for investment.
• 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 and is completely insured
• They aim to generate returns in line with the returns of physical gold
• Being a financial form of investing in gold, there are no making charges or premiums, and are thus more cost efficient
• Gold ETFs are traded on the NSE and BSE, are liquid with thin difference between buying and selling price
• They offer investors a means of participating in the gold market at low denominations like 1/2 gram
• Gold ETF’s also enable investor to take physical delivery of gold above a threshold holding
Another avenue for gold investing is Sovereign Gold bonds. Though these bonds pay an annual interest and are tax efficient, they suffer from low liquidity (8 year tenure with an exit option from 5th year onwards only, also they are tradable on exchanges but only among their tranches of issuance, thus limiting liquidity and trading at a discount) and have limits on maximum investment (4 kg per individual per fiscal year). So from a portfolio perspective, Gold ETFs are far more efficient.
|Name of the Scheme||This product is suitable for investors who are seeking*||Riskometer|
|Quantum Gold Fund|
(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.
Mutual fund investments are subject to market risks read all scheme related documents carefully.
Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: 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. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.