DEVELOPMENTS IN GOLD MARKETS

[Source: Economic Times, various issues]                                                                                           

 

Gold brings stability to a portfolio: The equity markets have been upbeat in the past few months and the investor interest seems to be returning to this asset class. The mood albeit is cautious since the remnants of the financial meltdown of 2008, which led to the equity markets crashing the world-over, still continues to haunt. While equity as an asset class has been evasive, debt too has lost its sheen with the rising fiscal deficit pinning down hopes of further rate cuts. However, there is one investment option on which investors are increasingly beginning to rely, and that is the eternal yellow metal - gold. The rise of the financial markets in the past few decades had pushed this asset to the background. But in the recent years, there has been a renewed interest in this commodity as an investment option.


The economics of any commodity is driven by demand and supply. The demand for gold has been steadily rising, while the supply has remained relatively inelastic, leading to a rise in the prices. Here is a case to invest in gold with a medium to long-term horizon. The central banks around the world are resorting to printing money in order to tide over this worst-ever financial crisis. This is increasing the money supply in the economy. This leads to paper currencies losing value, and eventually it leads to a rise in inflation.

Gold acts as an effective hedge against inflation. The value of gold in terms of the real goods and services which it can buy has remained stable over the long term, indicating that gold does not lose its purchasing power. The consequences of a rising fiscal deficit and huge stimulus packages announced by the US government are indicating a weakness for the dollar. Gold which is used as an ultimate reserve currency moves inversely with the world's reserve currency, that is the dollar.

Risk management: Gold generally is a less volatile asset and is also relatively not correlated with the movement of other assets such as equity and other commodities.

Introduction of a low volatility asset such as gold in your portfolio can reduce the overall risk of the portfolio, and stabilise the returns.

Most portfolios are largely invested in traditional assets such as equity and fixed income instruments. Diversification is essential to ensure the portfolio does not get unduly affected by the movements in one particular asset class. With the ease of investing in gold in paper form, allocation to gold to the extent of 10-15 percent in the portfolio can reduce volatility and bring stability. Investing in gold has become less cumbersome with the introduction of exchange-traded funds and futures. While investing in gold bars or any physical form of gold used to be the preferred investment option, it came along with the hassles of storage and the risk of theft.

However investments in paper form has attracted a whole new breed of investors to gold. Gold exchange-traded funds (ETF) are traded on the stock exchange. It is the most convenient way of investing in gold. One unit of the fund approximates one gram of gold. These units are backed by equivalent quantity of gold which is of the highest quality, and is secured and insured.

Coupled with low transactions charges, no wealth tax and concessional income tax if held for one year, make it a worthwhile investment. For short-term traders, commodity futures in gold offer an opportunity to trade in gold and make the most of the movements in the commodity.

In futures, you can buy or sell the commodity on expectations of the prices moving up or down. However, the risk involved is higher in gold futures and you should not tread this path without adequate expertise.

There are dedicated fund of funds which do not invest in gold directly, but in gold mining companies. These funds carry the dual benefit as well as the dual risk of equity investments. Investing in gold is not free of risk but the risks are more predictable than the ones affecting equity markets.

While equity still remains the best option for long-term wealth creation, allocation to gold in a small way in your portfolio can go a long way in building a robust and balanced risk portfolio. Gold ETFs a safer bet in times of crisis: With India being the largest consumer of gold, the rather modest response to gold exchange traded funds (GETFs) looks a little unusual. However, experts say, this may be a good time to invest at least a part of your corpus in this asset as equities go through a rough patch and most fixed income avenues are giving sub-inflation returns.

“When gold ETFs were launched in February 2007, equities were doing quite well, so people were not enthusiatic about this product. But with the markets seeing a huge correction since January 2008, people are increasingly turning to GETFs,” Benchmark Asset Management’s executive director Rajan Mehta said.

The number of investors in Benchmark’s GETF in the past one year has risen by 60-70 %, he adds. Gold ETFs are open ended mutual funds that put your money in physical gold and issue units to you in demat form. There are currently five gold ETFs in the market — Benchmark Gold BeEs, UTI Gold ETF, Reliance Gold ETF, Kotak Gold ETF and Quantum Gold ETF — listed on the National Stock Exchange.

“Globally, the trade involved with gold ETFs is to the tune of 750 tonne while in India trading in this new product is at a meagre 5-tonne level ,” said World Gold Council director, Dharmesh Sodah. “If one invests in phyical gold like jewellery or bar, one has to pay high premium and one may not be sure of the purity level too, which is not the case with GETFs. With high volatility in the stock market, GETFs may be the most cost-effective form of investment ,” adds Mr Sodha. “One should look at fresh investments in gold in any form to take the benefit of rising crude and energy prices. Also, gold is the best hedge against inflation,” says Kotak Commodities’ associate VP, Si Kannan. “Ideally, one can invest 10-15 % of one’s portfolio in commodities , especially gold,” he says.

Historically, the returns of equities and commodities like gold have an inverse relationship . Thus it makes sense to invest in GETFs now in view of current weak equitymarket situation. While the plusses of investing in GETFs include cost effectiveness, low ticket size, guarantee for purity, high liquidity and no storage requirement, few issues like people’s affinity to stick to physical gold and lack of awareness is still holding this ‘paper-gold ’ from shining. “As it is a no-load product (no entry / exit load), we don’t pay any commission to the imtermediary who in turns doesn’t educate or explain the product to the investor. We are in touch with few financial planners to create awareness,” adds Mr Mehta.

Gold ETFs are quite similar to mutual funds. The money you invest in gold ETFs is used to purchase physical gold of equivalent value. The advantage of ETFs are that the fund house that issues the gold ETF takes over the responsibility of storage and insurance of this gold. Gold ETFs are also tax efficient unlike physical gold. “While physical gold is considered a long-term investment, only if you hold the same for three years, gold ETFs acquire this status after one year,” says Mr Mashruwala.

In short, selling gold within three years of purchase will attract capital gains tax. Moreover, holding large quantities of physical gold can attract wealth tax, while gold in demat form does not. This apart, the spread between the buy and sell prices pertaining to gold ETFs is less than that of physical gold. In other words, while your jeweller could sell you a gram of physical gold at Rs 105 and buy the same at Rs 95, you can buy a unit of gold ETF at Rs 101 and sell it at Rs 99. “Doing an SIP in gold would be the best option in the current scenario,” reckons Pritam Patnaik, AVP, Kotak Commodity Services.

The two gold ETFs that are more than a year old — Gold Benchmark ETF and UTI Gold ETF — have delivered more than 40 per cent returns in the last one year. In case of others too, the returns have been positive for most months, in contrast with equity and debt funds that have posted negative or mediocre returns. However, the two world gold funds, which invest in stocks of gold mining companies, have had to suffer a fate similar to other equity funds. “It is advisable that you invest in gold as a commodity. Gold funds basically invest in gold mining companies. If you buy a gold fund, you actually invest and take a risk on that company and not on gold," adds Mr Gopkumar.

Go for Gold: The average return on gold in the past year has been around 30 per cent. But if you are planning to buy gold for investment purposes, make sure it comes with tax benefits and security. Gold has been doing well because of inflationary fears and the downtrend in equity markets. It is also proving to be a good hedge against inflation, justifying Indians' age-old faith in the yellow metal. The average return on gold in the past one year has been in the range of 30 per cent, making it one of the best performing asset classes right now.

“Due to the current economic downturn and inflationary fears, gold is doing well,” says Keyur Shah, associate director, World Gold Council, India. Gold has been rising over the past one year and experts feel the trend will continue . Some analysts expect the average gold price to hover around Rs 14,000 (per 10 gram) by December 2008. Considering that gold prices are fluctuating between Rs 12,500 and Rs 13,000 of late (after touching the high of Rs 13,680 on July 15), there is still some upside. “A weak dollar following a slowdown in the US will definitely boost the value of gold even further,” says Kartik Jhaveri, director, Transcend India.

While individual gold holdings are the highest in India, most of it is in the form of jewellery. But jewellery is an uneconomic method of holding gold as on selling jewellery you will lose up to 10 per cent of the gold value and also the making charges that you paid during the purchase.

“Those who want to buy gold for investment, prefer buying medallions and bars — this category has been growing in India over the past few years,” informs Mr Shah. Although coins and bars do not attract making charges, the sale discount is still there if the gold is not hallmarked. Hallmarked gold attracts the lowest discount and can be sold at 1-2 per cent lower than the market value.

Gold jewellery is not as good a investment as it is not as liquid as bars or gold funds, points out financial planner Gaurav Mashruwala. If you are saving to buy jewellery it makes sense to buy gold coins. These coins are accepted by jewellers in return for gold used in jewellery. If you intend to sell the coins, you may have to take a discount of up to 4 per cent, irrespective of how pure are the coins/bars.

But if you are holding a large quantity of gold, you will have to make provisions for storage and insurance as there is a security issue in keeping gold at home. Gold, debt emerge as safer options: The continued volatility in stock markets following the collapse of major financial institutions in the United States last week has resulted in investors redirecting their investments towards safer avenues like debt and gold.

The trend was quite evident even before the US subprime crisis engulfed giants like Lehman Brothers and AIG. While the flow of new equity-oriented funds has dried up, a spate of new fixed maturity plan (FMP) offers have been launched in recent months indicating investors’ inclination for debt. The general perception is that fixed income instruments are safe, and hence fund houses seem to be cashing in on the sentiment. Likewise, many Indian investors seem to have chosen to repose their faith in the other safe haven – gold, the traditional favourite. Despite the ongoing pitru paksh period, which usually witnesses a fall in demand for the yellow metal, global uncertainties seem to have distorted the trend.

The instability is palpable, with expert opinion tilted towards the likelihood of a rise rather than fall in gold prices, putting a question mark on the prudence of investing in gold at this point of time. “Buying gold immediately after a sudden spurt is a strict no-no, because the spike may be a temporary one with a correction lurking around the corner,” explains Swapnil Pawar, director, PARK Financial Advisors. Investing in debt, though, is finding favour with experts and investors alike. “Nobody wants to invest in equities. Now the emphasis is more on instruments promising assured returns. Given that debt is a good investment option in the short-term period, it is gaining popularity,” informs Mr Pawar.

If you are among those convinced of debt as a relatively risk-free alternative, you need to take a call on the ideal instrument among the entire gamut of fixed income instruments available today. Among FMPs, FDs and liquid funds, financial planners are in favour of FMPs due to the dual benefit of tax efficiency and fixed returns that they offer. “In case of FMPs, you are aware of the rate of return as the yield is projected by the fund house.

However, if you are looking at debt only as a stop-gap arrangement, i.e till you make up your mind on where to invest, you should go for cash or liquid funds,” says Kartik Jhaveri, director, Transcend India. Adds Mr Pawar: “FMPs are superior to FDs, especially for individuals whose annual income is over Rs 5 lakh. Simply put, if these individuals invest in a one-year FD offering a return of 10%, the post-tax yield will work out to 6.5% whereas they can earn around 9.5% in an FMP.” When you invest in debt, you need to focus on two aspects. One is the interest rate quoted by banks and the other is the indicative yield, that is, where the rates are headed. Currently, experts are expecting the yield to hover around 8.5-9 %, which implies that rates have almost peaked.

So, it makes sense to lock into an FMP/FD now. In addition, there are other instruments like debt mutual funds or long-term gilt funds which will benefit in a falling interest rate regime. “In fact, investors can earn as much as 15% if they stay locked in a long-term gilt fund for a year,” feels Mr Pawar. Investors often cling to debt under the impression that they are safe instruments. While it is true that they are relatively safer than most asset classes or investments, even they come with some strings attached.

Apart from the fact that the over 12% inflation eats into the returns, they carry other risks as well. If you want to lock into an FD, you need to ensure that your bank has a good track record as FDs have single bank exposures.  Most depositors are assured of their money even if the bank folds up but still it helps to exercise a bit of caution. In case of FMPs, which look safe with attractive returns, you should look at the indicative portfolio to avoid default risk. A thorough scan of the indicative portfolio will equip you with the information on the issuing companies, thus helping you determine the risk associated with the FMP.

Also, financial planners advise investors to stay away from FMPs with exposure to real estate companies, given the uncertainty in the sector. Similarly, government securities are 100% risk-free as far as interest and principal repayment are concerned. However, since they are also open to interest rate risks, one should ideally avoid them when interest rates are rising. Conversely, in a softening interest rate scenario, they qualify as a very good investment avenue.


7 reasons why gold prices are falling

TNN | Jul 20, 2015

 

Gold suffered a big jolt on Monday and plunged sharply to touch a two-year low as panic-stricken investors and speculators went on a selling spree sparked by global liquidation worries. 

Standard gold (99.5 purity) sank by a whopping Rs 520 to finish at Rs 25,250 per 10 grams - a level not seen since June 28, 2013 as compared to last Friday's closing level of Rs 25,770. 

Pure gold (99.9 purity) also tumbled by Rs 520 to end at Rs 25,400 per 10 grams from Rs 25,920 previously. This is the biggest fall so far this year for the yellow metal. 

Here are 7 reasons why gold prices are falling across the world: 

1. Curb on gold import 
Tough measures taken by both the government and the RBI to curb gold import amid slowing investment demand against the backdrop of a strong rally in equities, which is emerging as a preferred investment asset class, are taking some sheen out of the yellow metal.
 

2. Higher domestic gold inventories 
India was the top consumer of the metal in 2014 and the second biggest after China in the first quarter of this year.
 

Higher domestic gold inventories is also having an impact on price movements of the yellow metal, a bullion trader said.
 

3. Concerns over monsoon 
Demand for gold in India is also sluggish as concerns over a weak monsoon still remain.
 
Farmers are key to the country's bullion demand.
 
Nearly two-thirds of India's gold demand comes from rural areas where jewellery is a traditional store of wealth for millions who have no access to the formal banking system.
 

4. Massive selling in China 
China on Monday dumped a huge amount of gold on the market, causing the price of the precious metal to fall drastically.
 
Reports that China gold reserves were half the expected level added additional selling pressure on gold.
 
According to reports, some 33 tonnes were sold in the Shanghai spot market on Monday as investors sought to shift focus to other avenues.
 

5. Stronger US dollar 
A stronger greenback makes dollar-denominated commodities more expensive for buyers using weaker currencies. That tends to dent demand and, in turn, pull prices lower.
 
In wider markets, the dollar hit a three-month high against a basket of currencies, making dollar-priced gold more expensive for holders of other currencies.
 
"The current downswing in Indian gold prices is directly related to the strengthening of the US dollar in recent times. We are hoping that the present trend may be arrested soon and the prices could stabilize within a month or so," said Mumbai Jewellers' Federation president Rakesh Shetty.
 

6. Worry over US Fed rate hikes 
Gold has breached key support levels as the dollar gained after Federal Reserve Chair Janet Yellen told Congress last week that the Fed is on course to raise interest rates if the US economy expands as expected.
 
A rise in US interest rates will attract investors to the dollar for higher returns, driving up its value.
 

7. Uncertainty in international commodity markets 
Heightened uncertainty in international commodity markets amid geopolitical developments in the aftermath of Greek debt deal and the historic nuclear agreement between Iran along with the world powers too weighed on bullion trade.
 
(With inputs from agencies) 

Source: http://timesofindia.indiatimes.com/business/india-business/7-reasons-why-gold-prices-are-falling/articleshow/48147574.cms


 

 

Gold Supply and Demand 2009  -  2014

 
The Gold Supply and Demand page offers you charts and information on the subject. In addition, you'll find a charts illustrating Gold's price in relationship with the supply and demand for gold over the last 5years.

Gold Facts

Gold is a chemical element with the symbol Au, the symbol comes from Latin word "Aurum" meaning "Gold." Gold's atomic number is 79. Gold is a dense, soft, shiny metal, and is the most malleable and ductile metal known. Pure gold has a bright yellow color, which it maintains without oxidizing in air or water.

Gold is a valuable and highly sought-after precious metal for coinage, jewelry, and other arts since long before the beginning of recorded history. The metal occurs as nuggets or grains in rocks and in veins deposits.

 

Gold Supply and Demand

Over the last 5years worldwide gold mine production has skyrocketed in some countries, while at the same time production has diminished in others. China stands out in the chart as the world's largest gold producer. Canada, Russia and Australia has also increased its gold output.

Gold Mine Production decreased in Indonesia due to union strikes and the government shutting mines down over safety. Gold production also decreased in Peru due to government enforcement against illegal gold mines. See article here. Furthermore, South Africa has been seeing gold mine production decrease year over year. 

South Africa, was at one time the world's largest producer of gold, but now due to lower ore grades and mine closings, the country is expected to see continued mine production decreases.

Gold Mine Production

Overall gold mine production has been on a constant rise over the last five years, this is the exact same trend found on the Silver Supply and Demand charts found here

Just like silver, before 2011, as the price of gold was climbing to new heights,  gold miners were signing contracts for new production, making them liable, in the future, for gold or money agreed upon with the client on the contract.

This is the reason why production has continued to increase over the years. 

But, due to expired contracts, lower ore grades, lower gold prices and bankrupt companies, gold mine production is expected to start coming down this year and in the future.

Recycled Gold

The decrease in Recycled Gold should not be surprising to anyone. 

Remember when gold was making its way up to $1900 a troy ounce, and just about everywhere you looked you saw a advertisement stating "WE BUY GOLD," well,  those signs have been slowly going away since the price of gold started to fall in mid 2012.

As the price of gold has decreased, people have not been interested in selling their old jewelry and other items that contained gold.

Gold - Net Hedging

The biggest surprise came from those who would hedge gold, namely the gold miners.

In any scenario, when a company hedges it is making an investment to reduce the risk of adverse price movements in an asset.

For instance, if in 2011, let's say you owned a gold mine, but weren't sure if gold was going to stay at its high price, you would have tried to hedge the gold that was in stock or still un-mined to retain the value of your investment.

But very few gold miners did this.

It seems, that the novice who sold his/her Recycled Gold before the price fell was smarter than the professionals who mine it.

The Definition of "Net Hedging" from the World Gold Council states:

That "Net Hedging" is; the change in the physical market impact of mining companies' gold forward sales, loans and options positions. Hedging accelerates the sale of gold, a transaction which releases gold (from existing stocks) to the market.  Over time, hedging activity does not generate a net increase in the supply of gold.  De-hedging, has the opposite impact and will reduce the amount of gold available to the market in any given quarter.

Overall, the numbers and comparisons in the Gold Demand charts speak for themselves, except the "ETF and similar line" on the chart.

ETF's are considered the most liquid form to trade gold, many of the investors who purchase these funds are considered "professionals."

A rule among all investors, especially professional investors, is to "Buy Low and Sell High," but until 2014, those who invested in these funds did the opposite. 

To find the World Gold Council's interpretation of these numbers displayed in the charts above, you can click their link in the sources box below. 

In addition, to find full year reports, type this in the search bar: "Gold Demand Trends - Full year 2010" or the year you'd like to searching

Source: http://www.free-bullion-investment-guide.com/gold-supply-and-demand.html

 

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