I. Gold prices are soaring, should you invest now? (Source - The New Indian Express)

• Gold prices have risen by nearly 8 per cent in rupee terms since August 1, and by 17.86 per cent since January 1, this year.


• If you had invested in gold five years ago, it was an even bleaker 1%. So, invest in gold only if you are going to wear it is the advice.

Worried investors are rushing to buy gold as fears of a worldwide recession, sparked by trade wars and economic slowdowns in India and China, grow more real. Gold prices have risen by nearly 8 per cent in rupee terms since August 1, and by 17.86 per cent since January 1, this year.

Gold prices surged in the week gone by to Rs 4890 for 10 grams of 24carat gold as investors scrambled to find safe havens to park their cash. Equity markets not only in India but worldwide went into a tailspin on mounting slowdown and currency wars fears after China let its yuan weaken beyond 7 to the dollar. The move was seen as a retaliation by investors to US President Donald Trump’s announcement that he would slap fresh tariffs on Chinese imports.As the stock markets slid, the value of gold rose sharply. Spot gold went up over $1,500 per ounce, up from about $1,440 per ounce.

Analysts point out that central banks, jittery about the state of their respective economies and in a bid to blunt the pain from the trade wars, have also been slashing interest rates. In the week gone by, besides the RBI, the central banks of New Zealand and Thailand have dropped rates.

Those who caught on to the boom at the right time including central bank governors can pop champagne in celebration. Central banks bought 374 tonnes over the first half of this year a record purchase by central banks for any first half since the turn of the century, according to the World Gold Council.

The RBI seems to have been among them. The RBI’s forex reserves data shows its foreign currency reserves in end June stood at $400 billion. On August 2, it fell marginally to $399 billion, mainly because the rupee depreciated. In the same period, however, it's gold reserves increased by $2.2 billion to a total of $25.16 billion.

Goldman Sachs predicts that gold could rise to $1,600 per ounce. If growth worries persist, possibly due to a trade war escalation, gold could go even higher, driven by a larger ETF gold allocation from portfolio managers who still continue to under own gold. Gold ETFs have recently built momentum almost as strong as in 2016, and we believe that can be maintained in the short term.This is, of course, an analysis for short term investors, though there are contrarian views too which feel gold has peaked. The global slowdown fears have peaked as have gold valuations. However unless there are war like skirmishes in West Asia or the sub continent, the gold value may not go up too much.

However, the question plaguing investment advisors has been whether gold earns an investor good returns over a longer period. Over a 20 year cycle, gold has increased in value by over 6.5 times. The BSE Sensex in the same period has, however, gone up 10 times.As an asset, gold should form one cornerstone in any prudent investor’s portfolio, though not the only one or the overwhelming one. Investment advisors say the smart way to invest in gold, if one has an appetite for it, is to buy gold backed exchange traded funds (ETFs).

The World Gold Council says that since the turn of this century, investment demand for gold has grown worldwide on an average by 15 per cent every year. This has been driven in part by the launch of easier ways of buying gold, such as gold backed ETFs, where buyers do not have to keep gold at home, but can simply buy a paper that represents their gold purchase.

Gold ETF prices soaring all of a sudden

With gold prices rising in the wake of slowdown signals, trade wars and stock market volatility, India’s Gold Exchange Traded Funds (ETF) have become lucrative options, with returns this year looking extremely attractive.The prices of most Gold ETFs on the National Stock Exchange (NSE) have risen by 16-18 per cent between April 1 this year till date.

II. Four ways to invest in gold, but should you? (Source - mint)

• Assess and add gold in your investment portfolio only if it is required.


• Gold returns are extremely volatile and you may find yourself at the wrong end of the stick when you have to exit

Global gold prices have risen 20% in the last one year and 14% in the last three months, while domestic gold prices are up 23% and 15%, respectively, for the same time periods.Gold, typically, flourishes as a safe haven in times of uncertainty, and global trade wars, tensions between Iran and the western nations and slowing global economies are all contributing to a feeling of uncertainty. India is not immune to these conditions. A number of global issues have surfaced such as the Iran conflict and trade wars, and gold serves as a store of value in such situations. Central banks were dumping gold and buying US dollars. Now we are seeing the opposite behaviour. With investor interest rising in the yellow metal, we tell you about some of the options available for investing.

Sovereign gold bonds

Sovereign gold bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. The bonds are denominated in multiples of 1gm of gold the maximum one can invest in is 4kg. The tenor of the bonds is eight years, with the exit option available after the fifth year. They pay a fixed coupon of 2.5%. The issue price of the bonds is fixed at the simple average of the closing price of gold of 999 purity, or 24 karat gold, on the last three working days of the week immediately preceding the subscription period and can be redeemed at a price that is the simple average of the closing price of the last three days. The bonds are listed on NSE and BSE and investors can buy and sell the bonds on the stock exchange after the subscription period is over at the current market price.You can buy the bonds using cash up to Rs. 20,000. Investors using online modes are eligible for a ₹50 discount on the issue price. The next tranche is scheduled to open from 9-13 September. The bonds can be bought from banks, stock exchanges, designated post offices and other notified sources.

Gold ETFs and funds

Mutual funds offer exchange traded funds (ETFs) that invest primarily in physical gold with each ETF unit typically representing 1gm of gold. The equivalent physical gold is held with the custodian bank and valued periodically, as per the Securties and Exchange Board of India’s (Sebi) guidelines. The performance of a gold ETF is benchmarked against the domestic price. Ideally, the returns from the scheme should match that of the benchmark. But there may be variations on account of the cash holdings and the costs involved in managing an ETF. It could also be because gold ETFs are now permitted to hold financial instruments such as exchange traded derivative contracts and the Gold Monetization Scheme.

ETF investors must have a demat account into which the units are credited and a trading account with a broker to buy and sell the units after the new fund offer for the ETF closes. This may be a constraint for some and mutual funds have worked around it by offering gold funds which are mandated to hold the units of gold ETFs. Investors buy units of the gold funds, just like any other mutual fund, and these funds invest in the units of the gold ETFs to give investors similar exposure to gold.

Physical gold

Traditionally, gold has been held in the form of jewellery, coins and bars. If you hold jewellery, you also have to pay for the making charges, which is deducted when you sell it off. This can be as high as 15% of the price of gold. The government has launched the sale of BIS-hallmarked gold coins weighing 5gm and 10gm and gold bars of 20gm of 24 karat purity through Metals and Minerals Trading Corporation of India Ltd. (MMTC) outlets. The coins are available at MMTC outlets and designated banks. MMTC also offers the option to buy back these coins or bars at the prevailing price thus offering investors liquidity. Then there are gold savings schemes offered by jewellers, where buyers make periodic deposits and use the sum to buy gold after a specified period. Usually, such schemes offer a discount or a similar benefit.

Digital gold

This is a facility offered by MMTC-PAMP Pvt. Ltd., a joint venture between MMTC Ltd. and Switzerland-based bullion brand PAMP SA, to accumulate gold by buying online through institutions, broking houses and payment platforms such as Paytm, Stock holding Corporation of India Ltd (SHCIL), among others. The scheme allows investors to accumulate gold by regularly buying gold of value as low as Rs. 1,000. The accumulated gold is kept in secure storage in the custody of MMTC-PAMPL with full insurance and investors can ask for delivery in the form of coins of different denominations, the minimum delivery being 1gm. The gold will be kept in storage for a maximum period of five years within which period the investor has to take delivery.

Conclusion:

Do not buy gold as a strategic allocation to meet goals. The returns are extremely volatile and you may find that your investments are in the red when you have to exit. Buy gold for some stability it can provide to the portfolio’s returns when other asset classes may be doing badly. However, the exposure should not exceed 10-15% even in these conditions.Sovereign gold bonds are suitable for investors who may not need the funds in the short term. It is advisable to invest in gold only if you see a need to buy gold for a goal such as the wedding of children. The Sovereign Gold Bonds with the periodic coupon and exemption from long term capital gains if held till redemption is the most suitable product for the long term. For investors who need liquidity, consider gold ETFS and funds.

Hope you enjoyed reading this edition.

Disclaimer:

The views of the authors/publishers should not be construed as advice. Investors must make their own investment decisions based on their specific investment objectives and financial positions and using qualified advisors as may be necessary. Opinions expressed in various articles are not necessarily those of Wealthmax Enterprises Management Private Limited(WEMPL) or any of its directors, officers, employees and personnel. Consequently, WEMPL or any of its directors, officers, employees and personnel do not accept any responsibility for the editorial content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same. Stock picks and mutual fund snapshots are not exhaustive and should not be construed as recommendations.