Showing posts with label Gold. Show all posts


goldetf
Gold has given positive returns for the past 12 consecutive years, going up from Rs.500 per gram to Rs.3000 per gram. Recently, Gold fell more than 9% in a single day and is been falling since then, leading us to believe that the gold run may have been over for now.

Investors often seek guaranteed and safe returns and seeing the price of gold rise continuously over the previous years, they would have been led to believe that the price of gold would never crash. However, this is not the case and prices do correct after giving such big returns over the years.

The reasons attributed to fall in gold prices are dip in demand, rising speculative activity and increased participation in equities. Equities all over the world have performed well, despite the gloomy economic climate.

There are not many reasons for gold to remain as a good investment. Only reason that we  could find is the slowing down of the  perception of global economy, which make investors to park their funds in gold.

So what should retail investors do?

As we have saying in previous posts about gold, investments should be limited to 5-10% of one's portfolio and that too Gold ETFs are preferred ones. Avoid trading in commodities or investing in physical gold (unless it is for jewelry purposes) and limit your investments in gold.

Be a wise investor !





Market is rife with the news about rising gold prices every day. In one of my previous posts I had discussed reasons responsible for rising gold. There is no foolproof methodology for determining whether this yellow metal is overbought or not as it is determined by demand & supply scenario.
But gold holds an empirical relationship with crude.
 Gold prices are expressed in dollars per troy ounce. (1 troy ounce = 31.1 grams) while crude prices are denoted in dollars per barrel.
The ratio of gold price to crude price has been found to settle around 15.
By this time spot gold is trading at 1691 $ per ounce while Nynex crude is hovering around 95 $ per barrel.
This gives gold to crude ratio as 17.8.

Gold prices are also juxtaposed against silver prices. Gold to silver price ratio have been found to hover in the 50-60 range.
Presently silver is trading at 32 $ per ounce and this give the aforesaid ratio as 52.84.
Gold is rising in the hope of stimulus package from the US Federal Reserve under which US fed pumps money in the economy (by buying bonds) to stimulate the fledgling US economy mired under the huge debt better termed as Quantitative Easing (QE).
This excess money flows into commodities especially gold as it used as a hedge against the inflation resulting in higher gold prices.
But following a severe reprimand from Republicans it will not be easy for the US fed to go with its stimulus programme.
If US Fed fails to implement the QE3 gold may see a decline.


There is an old Sanskrit maxim from India that says, “सर्वे गुणाः काञ्चनमाश्रयन्ति”- that means all virtues lies in the person possessing gold. This importance of gold has been very well justified in recent years.
Since January 2000, gold has given a whopping 489 % of absolute return that means money invested in gold turned almost around 5 times in just 12 year. Gold prices rose steeply since the year 2007 onwards.


Gold, once considered as an idle asset suddenly turned into a desirable investment option for investors!

Why Gold Rates are increasing?

There are many reasons for the soaring of the gold prices but I shall discuss the most common of these.

(1)    Demand & Supply:  As per this economic principle, price of a commodity increases when higher demand of that commodity is not counterbalanced by its higher supply.

Demand of gold is increasing day by day while gold mine production is declining and there has been no significant success in discovering new mines.
so far only 1,65,000 metric tonne of gold has been mined.

It is evident from the graphs that demand for jewellery and bullion has been continuously increasing. Gold buying by various governments and central banks fall under Official purchase category.







Simply put, gold demand is continuously increasing and the same is not matched by the supply (mining production and resale). There has been no significant new gold discovery . Mining costs are also increasing. Unless there is significant new gold discovery, demand pressure shall continue to loom exerting upward pressure on gold prices.



(2)   Gold as an Investment option:

(2.1)  As a Hedge Against Inflation: As per the conventional wisdom, Gold is a hedge against the inflation. This means when inflation is raising prices of gold shall also increase and the investor shall be benefitted. Gold has tendency to soar aggressively during inflationary environment.

(2.2)Handsome Returns Delivered So Far:  As mentioned above, investment in gold’s price has almost quintupled in 12 years and this is why investors are tempted to buy gold in the hope of further appreciation.

(2.3)Unattractiveness of Other Asset Classes: Due to global economic turmoil and events like Europe’s sovereign debt crisis, recession in USA or slowing Chinese economy ,other asset classes -stocks, treasuries (and similar), became unattractive and funds ended up buying gold.

(2.4) Enhanced Buying Spree by Global Central Banks: Across the globe central banks of various nations are voraciously pursuing their gold buying spree. Global economic crisis forced central banks to lose faith in the currency like US dollar and instead they started parking  considerable part of their reserves in gold in a move to reduce their reliance on US dollar denominated treasuries. Such a higher reliance on gold over other fiat currencies stems from the intrinsic value of gold which every fiat currency lacks making them vulnerable.

         When and why central banks started hoarding gold?

After the demise of Bretton woods system which relied on gold in the year 1971, global central banks never needed to hoard the physical gold. 
But in the aftermath of 2008 financial crisis, central banks realized the importance of gold  owing to its underlying intrinsic value.
         

(3)    Weak Dollar & US Rating Downgrade Fear: Dollar is world’s reserve currency and gold prices are marked in dollars. This means when dollar turns weak the prices of gold shall rise.
              As evident from the above chart dollar has significantly weakened in last 10 years. 
                                                                                              
This weakening  helped gold to surge high. 
Us dollar indexmeasures the strength of the US dollar against a basket of currencies. Investors who were earlier investing in US treasury productsstarted allocating some part of their corpus in the gold territory.
Earlier Many foreign central banks would keep a substantial part of their reserves in US treasuries to keep their local currency competitive but weakening dollar and looming threat of US credit downgrade forced them to redeem treasuries and instead buy gold. This move exerted  upward pressure on gold prices.

(4)    Relation with other commodities: Gold plays an important relationship with crude oil. Rising crude prices translates into higher inflation and to conquer this inflation more gold buying takes places as discussed in 2.1.

(5)    Depreciation of Local Currency: This is a country specific phenomenon. If local currency of a nation depreciates against the USA dollar (being the reserve currency gold prices are marked in US dollar) then the price of the gold increases in that country.This happens even if there is no substantial change in international gold price. 
I have elaborated this point here.

(6)    Money Printing By Various Governments:Various governments over the world are printing money in one form or other- whether it be quantitative easingin USA or issuance of oil bonds in India, these are nothing but the money printing.
Simply put, money printing means artificially (without keeping any collateral like gold, money is created by an electronic entry) increasing the money supply in the ailing economy in the hope of a boost in growth.
Higher money supply results in the weaker local currency. weaker currency not only means higher gold prices but attracts higher investment in gold thus exerting further demand pressure which consequently results in higher gold prices.
Money printing makes the credit easy that leads into higher inflation as a result more money flows in the gold territory to hedge against the inflation.

(7)    Gold As A Solution To Financial Crises:


 Europe’s sovereign debt crisis fortified the need of gold as collateral- some of PIGS countries nearly reached on the verge of default on their bonds.
Europe is the largest holder of the gold reserves.
If gold reserves are used as collateral the same can’t be placed on the block for sell unless the lien is lifted off – resulting in a gold supply constraint which lasts till lien is lifted. Interrupted supply results in higher gold prices.


(8)    Excess Money in the Global Economy: due to measures like money printing by various economies, excess liquidity gets created.
This excess liquidity finds its  way into commodities making them dearer.
Not only gold but other metals (precious and base) too have been multiplied globally.

(9)    Losing Faith in Fiat Currencies: with gold-standard gone, all currencies are fiat currencies.
A 100 dollar bill is just a paper and it has no intrinsic value. Indiscriminate money printing by a country's government makes this fiat currency literally meaningless.
The best example is of Zimbabwe where to buy a groceryproduct one has to carry bundles of currency notes.The countries where currencies are losing value, investors start protecting their wealth by investing in Gold.

These gold coins have intrinsic value much higher than the denomination value.
Minting gold coins reduces the availability of mined gold and exerts upward pressure on gold prices.
This practice was implemented to mock the deterioration of the fiat currencies as discussed in point (7).

Why gold demand in increasing in India?

In volume terms India is world’s largest gold market and is continuously expanding.



India and China collectively account for around 45 % of the demand.
Demand for gold for traditional reasons like marriage, festivals, rituals etc was always there in India and it started rising exponentially after the country liberalized. The most overlooked reason for higher demand of gold is black money- which can be effortlessly employed in the gold and real estate.
Rising corruption also enhanced the demand for  gold bars (better known as Cadbury in local parlance due to its resemblance to chocolate) is a convenient way to park black money.Gold being  portable and less bulkier, can be easily stacked in a locker.

During raids and seizures it is now common to find gold bars from houses and lockers of corrupt and unscrupulous people.
Demand for gold coins and bullions which was 25 % higher in 2011 than 2010(as evident from graphs)  second this point.
Not only gold but diamond prices have jumped significantly but diamonds are generally used in very high value transactions.

What can bring down the gold price?

Huge new gold discovery or heavy gold reserve selling by official holders and big investors, could only be reasons for gold to go southwards but probability of the same is bleak.

Akshaya Tritiya, by Indian tradition, is considered an auspicious day for buying gold. Nowadays, there are quite a few options for investors who want to invest in gold, other than physical gold. Prominent among them are Gold ETFs,Gold Funds and Gold coins from banks. Let us take a look some of the advantages and disadvantages of these products.

Akshaya Tritiya


Physical Gold or Gold coins: 

Buying and selling physical gold adds substantial costs to your purchases, since jewelers always charges a making cost of 7 to 21 per cent over and above the price of gold. Also, when you want to sell it back to the same jeweler, you would be offered lesser price than the market price, which is a big disadvantage in investing in physical gold.Also storing your physical gold in lockers can cost you about Rs.1000-5000, depending on the institutions which offer you lockers and there are always risks associated with such placements.

As far as Gold coins are concerned, they are similiar to physical gold, involving costs of about 4-5% of the price of the gold.You can either buy these coins from the jeweller or from leading banks. You have to note that,you cannot sell the coins back to the banks as most of them don't offer such facility.

Gold ETFs:

Exchange Trader Funds or ETFs: If you have missed earlier article about Gold ETFs, you can read it here at Gold ETFs. In short, ETFs are cheaper, liquid and easily bought and sold through any stock broker with a Dmat account. Check out the list of Gold ETFs avaialble.

Gold funds: 

Gold funds ( Fund of funds) are similar to ETFs, but more simpler. They don't require Dmat accounts like ETFs and there could be some charges like entry and exit loads. These charges are less than 1%, which is the same you have to pay your stock broker when purchasing ETFs, so not much of a difference. The advantage with gold funds is that they can be bought with any amount as low as Rs.500 or 1000 depending upon the mutual fund. Also, SIP option is available, in which one can invest fixed amount every month. Check out about the features and various Gold Funds.

Conclusion:

Considering the pros and cons of all the investing options available, Gold Funds are better and ideal for retail investors and the next better option could be Gold Etfs. Now the bigger question is whether one can invest in gold at these prices ? Investors need to understand, gold as an asset class has given positive returns for the past 10 consecutive years. The prices cannot go up continously and they can correct and correct substantially. Also investing in gold should be limited to 10-15% of one's portfolio and Gold alone should not be one's core portfolio.

 Invest wisely !

masterandstudent-goldfunds
The buzz word in the investing world is now - GOLD. Nowadays, there are many ways to invest in gold, other than buying physical gold and they are Gold ETFs and Gold Funds. There is a lot of confusion among retail investors about understanding and investing these products and we are quite sure this article would clarify things better.

To make things clear, both Gold ETFs and Gold Funds are mutual fund products — only the mode of purchase differs. The Gold Funds are fund of funds, which invest in their own fund house ETFs, for e.g., HDFC Gold Fund invests in HDFC Gold ETF.

Similar funds have been launched by Reliance mutual fund, Quantum mutual fund and Kotak mutual fund. Investors can get details of these funds from their respective websites.

Gold ETFs:
  • ETFs are exchange traded funds launched by leading mutual funds which are traded in stock exchanges like Nse and Bse.
  • You need a Dmat account and a trading account with your stock broker, to buy and sell these ETFs.
  • Charges involved are brokerage charges and Dmat charges.
  • They can be bought and sold over the exchange through a broker on a daily basis during trading hours. Gold ETFs provide an opportunity to benefit from changes in price movements of gold as the prices of gold ETF reflect the value of the underlying gold on real time basis.
  • SIP is not possible, since it involves manual purchase by the investor every month.

Gold Funds:
  • Gold Funds are fund of funds launched by mutual funds, which can be bought and sold through mutual fund agents or through online websites offered by the fund houses.
  • You don't need a Dmat account or trading account.
  • Charges involved - no entry load, but exit load of about 1 - 2%, if sold before one year from the date of purchase.
  • Can be bought and sold on any working day, but the NAV of the fund at which the fund sells the units is based on the closing NAV calculated based on price of the gold on the previous day.
  • SIP can be done, which is a good positive thing, since investing a fixed sum of money every month ensures you better average cost of purchase.
To sum it up, investing in Gold Funds are for those investors who want to invest in a simple and systematic method, involving lower costs. Whereas ETFs are for those active investors and traders, involving high costs and continuous monitoring of buying and selling.

mas-e-gold
The buzz word now in Gold Market is E-Gold from National Spot Exchange. What's this E-Gold all about and how is this different from Gold ETFs, which are already traded in National Stock Exchange?

E-Gold is offered by National Spot Exchange Limited(NSEL) which enables you to buy gold in electronic form, and hold it in a Demat account.

Features of E-Gold:

1. You can buy and hold minimum of 1 gram of E-Gold in electronic form.

2. The commission and the transaction charges would be about 0.5%,same as you buy any other ETF from NSE.

3. E-Gold can be converted it into physical gold, which is known as re-materialization and there are charges for this re-materialization. The minimum quantity for converting into physical gold is fixed as 8 grams.

4.Rematerialization facility is currently available in 15 major cities and hence if you want to convert it to physical gold, check with your broker.

5. VAT: When you rematerialize you will have to pay some rematerialization charges (which will be in the range of Rs.150 for 8 grams), but the VAT might be a bigger amount based on how much quantity you hold.

6. The storage charges of holding gold in demat form is Rs.0.60 per unit/month.

7. The purity of e-gold is not approved by LBMA and there is no standard benchmark in domestic gold prices.

8.One can trade in gold ETFs only till 3.30 p.m., while e-gold can be traded till 11.30 p.m., providing the investors better opportunities and flexibility.

Apart from E-Gold, the other commodities available are E-Silver and E-Copper. Since no Silver ETFs are available currently, E-Silver is a better option, if anyone wants to invest in silver. And the minimum quantity is been fixed at 100 grams and the transaction charges are similar to E-Gold. You can get the live data from National Spot Exchange.

The idea behind both e-gold and gold ETFs is the same, which is relieving investors of the worry of storage and purity, making gold investment more efficient and convenient. Though E-Gold is a cost-effective for people who have a long investment horizon, investing in gold through ETFs would be more prudent for small investors.

masterandtudentgold
The country's premier commodity exchange Multi Commodity Exchange of India Ltd (MCX) has launched 1 gram gold contract namely Gold Petal futures contract, which is primarily launched targeting small traders. Already there are many such contracts developed by MCX like Gold (1 Kg), Gold Mini (100 grams) and Gold Guinea (8 grams).

The trading unit of the gold contract is 1 gram and the initial margin required to trade will be 4%, which would be around Rs.100, based on current market price of Rs.2100. The delivery of contract is possible in dematerialised or physical form, but the minimum quantity has to 8 gm.The physical delivery is available in multiples of eight gram coins with London Bullion Manufacturers Association (LBMA) certified 999 purity. The delivery centers are G4 Securitas at Mumbai, and other major cities.

There are many Gold ETFs like Gold Bees by Benchmark funds and many other ETFs by various fund houses like Reliance, HDFC available. Small investors can take the route of ETFs rather than the current product by MCX, since this would lead them to margin trading. This is because many are unaware of the risks involved in margin trading and their consequences of it.

Hence it is better to buy gold only through ETFs. Be a wise investor !

goldbees
The country's premier stock exchange NSE (National Stock Exchange), has launched a new website in the interest of small investors to spread awareness and benefits of buying gold exchange traded funds (ETFs).In 2007, there was only one Asset Management Company (AMC), Benchmark Fund offering Gold ETF,(Gold Bees) in the market. As on date, there are more than 10 AMCs offering Gold ETFs and investing in them is getting more and more popular and easier.

Gold ETF is gold in an electronic form and it is just like buying shares of any company through a broker. Through Gold ETFs, one can even buy just one gram or half a gram of gold at a time. Gold prices had risen more than 20 per cent compounded annual growth rate (CAGR) since April 2007. While 10 gm of gold cost Rs. 9,357 in April 2007, it is now priced at over Rs 20,000.

To know more about Gold ETFs, you can read it here at Gold ETFs and Nse's website NseGold.

reliancegold
Reliance Mutual Fund is launching Reliance Gold Savings Fund which intends to invest in units of Reliance ETF. We know about many Gold ETFs and what is this Reliance Gold Savings Fund all about?
This is a fund which invests in already existing Reliance Gold ETF to the extent of at least 95% of the corpus size, and becomes a fund of funds which is first in its kind in India.

The Fund allows the investors to invest in Gold the through physical mode and thus makes it convenient for investors who do not have a broking account or a demat account. The fund seeks to make the investment in gold in a more convenient manner by allowing investment through systematic investment and transfer plans.The fund focuses on providing the returns as provided by Reliance ETF, which invests 99.5% of its portfolio in bullion.

NFO Features:
Open Ended Fund of Funds.
Issue open:14 February, 2011 -28 February, 2011.
NFO Offer Price: Rs.10 per unit.
Minimum Application Amount : Rs.5,000.
Entry Load: Nil.
Exit Load: 2% - if redeemed 1 year from the date of allotment of units.
Options: 1.Growth 2.Dividend (Dividend Pay-out and Dividend Re-Investment)
Also :SIP/STP/SWP/Auto switch/ Trigger facility available.

Gold prices are in an upswing in the recent times and in the year 2010 gold prices were noticed to have touched it highest in the last two decades.For the tenth year in a row, gold prices gave positive returns in 2010. Investors across the globe have started investing in gold in order to hedge against inflation and currency risk, apart from investing in gold as a separate asset class. Hence one can invest in this fund but with a limited exposure of not more than 5-10% of one's portfolio.

masterandstudent goldbees
Axis Mutual Fund has launched an open-ended Gold ETF, Axis Gold ETF. This is yet another Gold ETF similar to already existing Gold Bees and other ETFs. During the new fund offer (NFO) period, retail investors can apply for minimum of Rs.5,000 and multiples of Re.1.

After the NFO period, the fund will be traded on the National Stock Exchange and traded like equity shares. The fund will be open for subscription from October 20 to November 3.

Why Gold ETFs ?

Gold ETFs lets you buy Gold without the necessity of taking physical delivery and without the associated risks of physical storage and impurities.

Is Gold a good investment opportunity even at this prices?

Gold has seen a steady rise since last 5 years with an annualized return of about 24%, currently trading about Rs.2000 per gram. But over 15-20 year period it tends to average less than 10% . Currently high price rise in Gold prices is due to global risk-aversion and supply constraints, as production has dropped.

Is this price rise sustainable and how much one can invest in these funds?

For the past 2 years investments in Gold has yielded more than 50%,  this doesn't mean gold will tend to keep on rising further to get sustainable returns.  Any investment in gold can be considered as an insurance and diversification only.  Therefore investors need not allocate their entire amount or large junk of their portfolio in such Gold Funds. One could invest about 10% of their portfolio only , if they haven't already invested in earlier such schemes.

icicigoldetf
Along with recent launches of many Gold ETFs,  here comes another one from  ICICI Prudential Mutual Fund ,  namely ICICI Prudential Gold ETF. We have already seen the benefits of owning Gold ETFs like Gold Bees  and adding to that,  here are some of the key features:

Liquidity: Unlike jewellery or coins/bars, ETF units can be liquidated easily to benefit from rise in price of gold.
Cost Efficiency: Costs lower than buying, storing and insuring physical gold.
Convenience: Post NFO: Buy and sell on the exchange.Can be bought and sold in small quantities – as low as 1 unit (approximately equivalent to 1 gram of gold).
Purity: 99.50% or higher.

Minimum ApplicationAmount (NFO & Post NFO):

Rs.5000/- and in multiples of Re 1 during NFO.Investors can buy or sell units (minimum 1 unit) on a continuous basis on the National Stock Exchange or the Bombay Stock Exchange. The issue is open till 29 July ,2010.

Why one should invest in Gold ?

The word ‘Gold’, in India, invokes a number of emotions, for some it is a form of adornment and a status symbol. Through the years gold’s appeal in India has evolved from an object of pure aesthetic value to a commodity which offers itself as an avenue for investment and wealth creation.

Also investing in gold allows investors, an diversification from other asset classes like Equity, Debt and Real Estate. Investors can allocate about 5-10% of their portfolio for Gold ETFs.

Gold Bees ETF
HDFC AMC has launched an NFO with the name 'HDFC Gold Exchange Traded Fund'. This is yet another Gold ETF, apart from existing schemes like Gold Bees, Rel Gold etc which are already traded in NSE. The fund will invest in 90-100% of assets in Gold Bullion.

Some of the features include:

The fund will be listed in NSE and can be easily bought and sold like any other stock on the exchange through terminals spread across the country.
The minimum investment is Rs.5000/- and the NFO is open till Jul 23 2010.
Can be bought/sold anytime during market hours at prices that are expected to be close to actual NAV of the scheme.
Post-listing, the minimum purchase would be 1 unit .

Can one invest in this NFO?

Gold has been one of the biggest outperformers of most of the asset classes, recently and can be still considered for investing.  Hence, investors who don't have exposure to Gold ETFs, can consider investing in this fund.
There are many other Gold ETFs like Gold Bees, Rel Gold etc which are currently traded in NSE, which can also be considered for investments.

fashionjewelleryRajesh Exports (REL), in a potential game-changing move for the industry, announced plans to sell products at per-gram rate, the buyer paying no wastage, making and other hidden charges. REL said the initiative, promoted as Gold Revolution, would be launched at its Shubh retail outlet showrooms.

Contrary to the general practice of all jewellery stores, Subh outlets will not charge any additional charges like wastage, making charge, value addition charge, etc. REL will sell 22 carat gold jewellery and coins with Hallmark of 100 per cent guaranteed purity.

For example, if a customer buys 10 gms of gold at a price of Rs 1,600 per gm, he actually pays 15 per cent 20 per cent more than the Rs 16,000 jewellery due to various hidden charges. But Subh will charge only 3 per cent or Rs 48 more per gram towards its various costs.

In next 3 years REL plans to open 250 Subh showrooms in various cities in the country, a ten fold jump from 25 at present. This will help the company increase its presence in jewellery retail space which now accounts only for 2 per cent of its revenue. Going by these developments REL is a definitely a stock to watch, in the coming days.
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