Gold has always enjoyed the status of a safe haven. But will the glittering truth allow investors to heave a sigh this time too? 4Ps B&M’s Sunanda Roy explores...
D iamond or gold! Which one do you think is a girl’s best
friend? Confused?! Certainly the fight has always been on (and will continue forever) when it comes to choose between the two. However, there are some that seems to have come upon a decision – of course that’s not girls – and have finally placed their bet on one! Well, those weary souls happen to be none other than stock market investors, to be precise the retail investors.
Certainly with a volatile stock market and FIIs pull outs amid equally dull macro indicators the worry of the hour is where should a layman place his savings? In a line – what is the best place to invest? And the sole resort at the moment seems to be gold. Raison d’être, prices of gold have almost doubled in the last few years and experts anticipate them to further keep on as they feel demand will continue to beat supplies for several years.
But then gold too, is now fraught with risks as the global economic outlook remains uncertain. Like everything else, their prices too move up and down. “If the global economy and thus the markets do bad, gold will climb in value. Else it might remain range bound or may even decline. For Indian investors there is an added worry of exchange rate risk since the rupee price of gold will be impacted by both dollar price and rupee-dollar exchange rate,” agrees Swapnil Pawar, Director, Park Financial Advisors. So, on account of this dual uncertainty, is investing in gold recommendable? “Yes of course! Gold or diamonds is anytime a better investment compared at least to real estate and stock market,” answers Sanjay Kothari, Ex-Chairman, Gem & Jewellery Export Promotion Council.
No doubt, gold enjoys the status of a safe haven, but it too has been underperforming in recent times due to continued sell off by fund houses and investor community. Although in the short run gold might be weighed down by the appreciating US dollar but in the long term its bullish sentiment is quite intact and its appeal as a safe investment tool in times of uncertainty may attract some fresh buying in days to come. Agrees, Pritam Kumar Patnaik, Associate VP, Head Retail Business, Kotak Commodities, “Gold has always been an investment for retail public. The risk reward ratio in gold is highly favourable for the long term investors as the returns are expected to be skewed positively”.
Moreover, as markets across globe are going through turbulent times where financial safety is of paramount importance and “since price of gold is negatively correlated to the movement in stock market, investing in yellow metal can certainly provide safety to the investors,” feels Amar Singh, Research Head (Commodities), Angel Broking. In addition, gold prices have remained almost the same as at the beginning of the year (in rupee terms) while all other markets have plummeted drastically. This too works in favour of gold. Adds Madan Sabnavis, Chief Economist, NCDEX, “Gold is a very good portfolio diversifier, hence can be used as an investment irrespective of what happens in other markets. The coefficient of correlation is low vis-à-vis stock markets and GSecs”. Further, as a high degree of uncertainty continues to be attached to paper assets, gold is likely to emerge victorious.
But then how long will this winning streak continue and to what levels? “We expect gold prices to touch a level of $640 per troy ounce in short term. Domestically by incorporating the average USD/INR rate at Rs.50 the expected gold levels will be Rs.10,360 per 10 grams. However, we expect bargain buying to emerge around $640-650 levels which may take the prices back to $780 levels in 3-4 months,” Ashok Mittal, VP & Country Head, Karvy Comtrade tells 4Ps B&M. But then Pritam Patnaik from Kotak Commodities offers a different view. “Gold is largely a currency play and lot depends on the developments post the G-20 meeting. We expect things to get worse in the next six months and gold is likely to trade around $1,130 an ounce during the 1QCY2009,” says Patnaik.
Certainly, the economic perspective to the price levels depends a lot on the dollar-euro relationship. If the dollar depreciates, then the price of gold will move up. So, one needs to take a call on how the dollar will behave which depends on the actions of the Fed and ECB in response to the monetary situation. Today both the central banks are focused on lowering rates, which in turn will speed up the economy, leading to higher spending and probably the deficits too.
So with the entire positive and the negative perspectives on the platter, their still remains a valid question – what portion of an investor’s portfolio should be in gold? “Normally it should be 5-10%,” feels Swapnil. No doubt, for the long haul, gold works as a good diversifier. But the portfolio should be created in a manner that it diversifies the risk of the investor. Hence, an even distribution based upon the risk appetite of the investor is the best way to go for. Even John Mulligan, Investment Marketing Manager, World Gold Council, says, “Our analysis, using state-of-the-art portfolio optimisation techniques, has shown that even with very conservative return expectations for gold, portfolios with a typical mix of equities and bonds will benefit from an allocation to gold, from as little as 4% in a low or medium risk portfolio to 10% in a high risk one”. So, by now you too would have definitely decided on who is your best friend!
D iamond or gold! Which one do you think is a girl’s best
friend? Confused?! Certainly the fight has always been on (and will continue forever) when it comes to choose between the two. However, there are some that seems to have come upon a decision – of course that’s not girls – and have finally placed their bet on one! Well, those weary souls happen to be none other than stock market investors, to be precise the retail investors.Certainly with a volatile stock market and FIIs pull outs amid equally dull macro indicators the worry of the hour is where should a layman place his savings? In a line – what is the best place to invest? And the sole resort at the moment seems to be gold. Raison d’être, prices of gold have almost doubled in the last few years and experts anticipate them to further keep on as they feel demand will continue to beat supplies for several years.
But then gold too, is now fraught with risks as the global economic outlook remains uncertain. Like everything else, their prices too move up and down. “If the global economy and thus the markets do bad, gold will climb in value. Else it might remain range bound or may even decline. For Indian investors there is an added worry of exchange rate risk since the rupee price of gold will be impacted by both dollar price and rupee-dollar exchange rate,” agrees Swapnil Pawar, Director, Park Financial Advisors. So, on account of this dual uncertainty, is investing in gold recommendable? “Yes of course! Gold or diamonds is anytime a better investment compared at least to real estate and stock market,” answers Sanjay Kothari, Ex-Chairman, Gem & Jewellery Export Promotion Council.
No doubt, gold enjoys the status of a safe haven, but it too has been underperforming in recent times due to continued sell off by fund houses and investor community. Although in the short run gold might be weighed down by the appreciating US dollar but in the long term its bullish sentiment is quite intact and its appeal as a safe investment tool in times of uncertainty may attract some fresh buying in days to come. Agrees, Pritam Kumar Patnaik, Associate VP, Head Retail Business, Kotak Commodities, “Gold has always been an investment for retail public. The risk reward ratio in gold is highly favourable for the long term investors as the returns are expected to be skewed positively”.
Moreover, as markets across globe are going through turbulent times where financial safety is of paramount importance and “since price of gold is negatively correlated to the movement in stock market, investing in yellow metal can certainly provide safety to the investors,” feels Amar Singh, Research Head (Commodities), Angel Broking. In addition, gold prices have remained almost the same as at the beginning of the year (in rupee terms) while all other markets have plummeted drastically. This too works in favour of gold. Adds Madan Sabnavis, Chief Economist, NCDEX, “Gold is a very good portfolio diversifier, hence can be used as an investment irrespective of what happens in other markets. The coefficient of correlation is low vis-à-vis stock markets and GSecs”. Further, as a high degree of uncertainty continues to be attached to paper assets, gold is likely to emerge victorious.
But then how long will this winning streak continue and to what levels? “We expect gold prices to touch a level of $640 per troy ounce in short term. Domestically by incorporating the average USD/INR rate at Rs.50 the expected gold levels will be Rs.10,360 per 10 grams. However, we expect bargain buying to emerge around $640-650 levels which may take the prices back to $780 levels in 3-4 months,” Ashok Mittal, VP & Country Head, Karvy Comtrade tells 4Ps B&M. But then Pritam Patnaik from Kotak Commodities offers a different view. “Gold is largely a currency play and lot depends on the developments post the G-20 meeting. We expect things to get worse in the next six months and gold is likely to trade around $1,130 an ounce during the 1QCY2009,” says Patnaik.
Certainly, the economic perspective to the price levels depends a lot on the dollar-euro relationship. If the dollar depreciates, then the price of gold will move up. So, one needs to take a call on how the dollar will behave which depends on the actions of the Fed and ECB in response to the monetary situation. Today both the central banks are focused on lowering rates, which in turn will speed up the economy, leading to higher spending and probably the deficits too.
So with the entire positive and the negative perspectives on the platter, their still remains a valid question – what portion of an investor’s portfolio should be in gold? “Normally it should be 5-10%,” feels Swapnil. No doubt, for the long haul, gold works as a good diversifier. But the portfolio should be created in a manner that it diversifies the risk of the investor. Hence, an even distribution based upon the risk appetite of the investor is the best way to go for. Even John Mulligan, Investment Marketing Manager, World Gold Council, says, “Our analysis, using state-of-the-art portfolio optimisation techniques, has shown that even with very conservative return expectations for gold, portfolios with a typical mix of equities and bonds will benefit from an allocation to gold, from as little as 4% in a low or medium risk portfolio to 10% in a high risk one”. So, by now you too would have definitely decided on who is your best friend!
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