Investing in Gold

The almighty dollar

Although India and China account for a bulk of world gold consumption, the price of gold continues to be set in London and New York. When you buy gold in India, you are exposed to two things:

  1. The dollar price of gold.
  2. The USD/INR exchange rate.

Even at times when the price of gold goes down in dollar terms, if the rupee goes down more, then you still have a profit in your hands. This partly explains why Indians are crazy about gold – it is the easiest way to get short the rupee.

Dollar returns of gold

If you look at the returns of the S&P 500 vs. gold since 1970’s, gold comes out a winner.


Not to say that it was easy to own. Gold peaked in the 80’s and remained out of favor till 2008!


Rupee depreciation

The dollar returns of gold is only a small part of the story. The bigger picture here is that of rupee depreciation. Let us see how USDINR compares with USD vs. a board basket of currencies:


See the blue line? That is how much the US Dollar has appreciated against the rupee. The green line is the dollar vs. other currencies with which America does business with.

With this in mind, let’s compare the returns from gold in USD vs. gold in INR:


Notice the troughs of Gold/INR is shallower than those of Gold/USD?


When you have a depreciating currency in hand, you can’t get rid of it fast enough. And the easiest way to do that in India is to buy gold. Our government can’t print more of it, can’t set its price and is fairly liquid.

Gold vs. NIFTY50

Since 2000, Rupee-for-rupee, gold had given better returns than the NIFTY 50.


It is only the recent under-performance that has the anti-gold lobby all fired up.


The long arch of the depreciating rupee is a more powerful force than what equity-only investors will have you believe.

Ways to invest in gold

Until recently, the only way to buy gold was to buy physical gold. However that is a very expensive proposition. Then came the gold ETF – GOLDBEES – that allowed investors to hold paper gold in demat form and provided instant liquidity. This year, the government came out with Sovereign Gold Bonds that is pretty good alternative. Here’s a handy table that looks at different aspects:


SGBs not only pay the price of gold at maturity but actually pay the investors an annual coupon. Currently, investors get 2.5% on their investment in SGBs. Contrast this to gold ETFs where investors have to pay asset management fees to the the fund house. From an asset allocation perspective, SGBs are a better deal than Gold ETFs. Go with gold bonds!

Should you go contrarian on Gold?

This time, last year, almost all believed the metal would rise through the year. Analysts issued an average price forecast of $1,753 per troy ounce. Instead, gold averaged $1,411, suffering its first down year in 13 and worst year since 1981. By New Year’s eve the price was $1,202.

Gold ETF (USD):

Gold ETF (INR):


Investment demand for physical gold fell 25% last year. ETFs that keep gold in vaults on behalf of investors have dumped nearly 30m ounces from a high of 84.6m ounces at the end of 2012.

Currie, Goldman Sachs’s head of commodities research, had a target of $1,050 an ounce back in early October. The biggest gold bulls have abandoned ship. Paulson told clients at his firm’s annual meeting Nov. 20 that he personally wouldn’t invest more money in his gold fund. Billionaires George Soros and Daniel Loeb sold their entire positions in the SPDR Gold Trust exchange-traded fund in the second quarter.

Given so much hatred about gold, should the contrarian investor jump in? No. The odds of runaway inflation is low, equity market returns are likely to be more attractive compared to gold’s in the near term and investors are still in the process of pulling money out of gold funds. There will come a time to challenge the bearish thesis on gold, but investors going long right now could end up being too early.

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Gold bulls lose faith in bullion’s allure
Goldman’s Currie Says Gold Is ‘Slam Dunk’ Sell
Paulson Said to Inform Clients He Won’t Add More to Gold

Gold: The New Normal

Credit Suisse published a report – Gold: The Beginning of the End of an Era – back in February. The basic thesis was that the peak of the fear trade has now passed and that against any sensible benchmark gold still appears significantly overvalued relative to the long run historical experience. Its important to keep the bigger picture in mind before you rush to buy the dips.

Here are some charts from the same report.

Long run gold price, real, 2007 dollars

The real price of gold (2007 dollars) remains at an extreme level

Gold is still near the long run highs in terms of base metals

Is gold really an inflation hedge

Gold is trading 3 standard deviations below the exponential trend


TL;DR: gold is expensive, has broken its uptrend and is a poor inflation hedge (in terms of USD).
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Is a bottom in sight for Gold?

The price of gold in USD terms is approaching the cost of production:


Simple logic would dictate that gold miners will start mothballing mines if its no longer feasible to mine and ship gold.


It will be interesting to see how this plays out in the days to come…

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Gold trumps stocks for third Diwali in row

The yellow metal is on course to record sparkling returns for third year in row despite a strong year for equities.

While investors in gold have reaped over 15% returns since last Diwali, the returns from Sensex has been a fixed deposit-like gain of about 8.5 % for the same period.

While the precious metal has risen from Rs 26,700 levels last Diwali to Rs 30,700 currently, the BSE benchmark Sensex has risen from near-17,300 levels to 18,755 since last Diwali. Gold prices have also more than tripled from Rs 10,000 levels to Rs 31,000 in the last five years. India is the largest consumer of gold with an annual demand of about 700 tonnes.


The fact that gold jewelry and investment demand remains robust despite the rising prices is a reflection of the inherent desire among Indians to hold gold driven mainly by its alluring appeal as a jewelry and as a safe-haven against inflation that erodes both savings and income.

The impact of the European sovereign debt crisis, inflationary pressures and the still-shaky outlook for economic growth in developed countries is driving high levels of investment demand for the precious metal.


From gold coins, gold jewelry to MFs and ETFs, robust consumer appetite in gold’s cultural heartlands, India and China, has seen global prices rise from $270 an ounce in 2001to more than $1700 an ounce as on November this year. India, the world’s largest gold consumer and China account for over 55% of global gold jewelry demand and 52% gold investment demand.

Gold is being seen as a safest hedge against credit risk, currency risk and inflation that has besieged the financial world in the last decade. With the financial world navigating from one hurdle to another like the mortgage crisis to the banking crisis to the current sovereign debt crisis, investors have sought refuge under gold to protect their wealth.


Apart from sluggish growth in stock markets and high inflation rates, a spurt in central banks gold buying since 2009 after being net seller for over two decades has also contributed significantly to demand and thereby prices.

Off late, gold ETF investments are gaining ground at a rapid pace and are increasingly emerging as preferred route for long term investment in gold.

Technical Analysis

Despite the Finance Ministry’s measures to discourage investments in gold, assets under management of gold ETFs crossed the Rs 11,000 crore mark in September this year from Rs 10,701 crore in August and Rs 5,000 cr in May 2011, reflecting the robust appetite for the yellow metal.

Even as jewelry demand has been declining due to the volatile prices, a reflection of the price-sensitive nature of this segment, the rush for gold ETFs has meant that AUMs have soared from Rs 138 crore in April 2007 to Rs 11,198 crore in September, 2012 — over 80 times in 5 years.

With Diwali and Dhanteras round the corner, festive flavor is expected to add more color to the yellow metal and garner greater portfolio share of investors.

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