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Gold – A foundation asset class for wealth creation

Gold is seen as a symbol of security and a sign of prosperity. Indian consumers consider gold jewellery as an investment and are well aware of gold’s benefits as a store of value. Gold is also recognized as a form of money in India, a tradable liquid asset.

It is one of the foundation assets for Indian households and a means to accumulate wealth from a long term perspective. Gold investment has been in the culture of Indian tradition and has been on rise amongst the modern investors as well due to the financial uncertainty and inflationary pressures.

Sector View & Outlook

Overview :
Gold is one of the few asset classes that have managed to thrive during stressful times. Gold prices have run up by more than 17 per cent since the start of July, 2011 and are hovering around 1757 USD/Oz as on 9th Aug, 2011. This rally has again awarded investors and reinstated confidence in gold’s safe haven appeal. Sovereign debt crisis, concerns over global growth, fear of higher inflation, central banks buying spur and strong investment demand were the main reason driving gold prices higher. Recently, the Standard and Poor’s downgraded America’s long-term sovereign credit rating from AAA to AA+ with a negative outlook. This is a major development in the financial history of the world, where US has held the highest possible AAA rating since 1917. This bold measure by S&P has raised many apparent questions on US credibility and ability to honor its debt obligation. Again, they cautioned that the rating could be further downgraded to ‘AA’ within next two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," said the S&P release. Such harsh statements dent the confidence world has over US growth and dominance.

Similarly, Euro area is also going through tough times. The European Central Bank has decided to create a new bail-out fund, the European Financial Stability Facility, although they need to ink the documents before this fund could be fruitful deployed. This week European Central Bank has decided to purchase Italian and Spanish government bonds. The move was prompted as yields on their debt were approaching unsustainable levels.
The crisis like situation in US and Euro area has made global equity markets tumble down, as was evident recently. US The Dow Jones Industrial Average, a widely followed indicator of the stock market, is down by more than 15 per cent in less than three weeks. European stock fell for an eighth day, the longest losing streak since 2003; The German Stock Index is down by more than 24 per cent in less than two weeks. Major commodities and energy complex have gone down significantly during the same period. Nymex Sweet crude Oil futures, the world’s most actively traded commodity, have gone down by more than 23 per cent during the first two week of August and is currently trading around 80US$/bbl. Silver has managed to stay firm while gold has thrived and managed to clock in more than 9 per cent return in first nine days of August, 2011.

Federal Reserve officials along with their global counterparts may strengthen their commitment to record monetary stimulus. During their meeting today, Federal Reserve pledged to keep interest rates near zero. - upto mid 2013. They also discussed a range of policy tools to bolster the economy, saying they are prepared to use them “as appropriate.”It seems likely that they may consider third round of asset purchases if needed.

Physical gold held in Exchange Traded Funds around the world has moved up to 70.95 Mn Oz on 9th Aug, 2011 from 66.32 Mn Oz recorded during 1st, July, 2011. Again, banks have started charging more to store gold after a surge in demand for precious metals, in some case they have more than doubled the rates charged for vaulting gold. This indicates strong investment flows in physical gold.

The Standard and Poor’s US downgrade dented the growth momentum. The current macroeconomic environment is well suited for higher gold prices. Gold surged more than 22 per cent so far this year, heading for 11th consecutive year of gain.

It is very hard to imagine the factors, which are driving gold prices rally, will die out any time soon. US is not likely to come out of dumps any time soon. They may be able to suppress the problem for time being but it is almost impossible to bring a permanent solution to this problem without going through pain.

Infusion of liquidity will be the most likely temporary solution, but the longer term undesirable impact of same is higher inflation numbers.

The political motive is likely to supersede the economic wisdom; It seems likely that attempts will be made to nurture growth without paying heed to potential inflation. It is also important to note that it is quick and easy to infuse liquidity in the system, but it is extremely difficult to withdraw liquidity at the same pace without painful consequences. Inflation is the most dreaded consequence of liquidity infusion. Again, growth momentum is tapering off and investors are concerned about growth trajectory. Gold tends to benefit from all of these events as it is seen as a safe haven alternative asset and a hedge against

Gold does not have statically significant correlation with other financial assets and has comparatively lower volatility. Hence, besides being an absolute performer, gold is an excellent portfolio diversifier. The longer term outlook for gold seems extremely bullish. Though correction cannot be ruled out, long term prudent investor should continue investing in gold as it improves risk adjusted returns for the portfolio.

Common Source for Gold View: Bloomberg, Reuters, World Gold Council

Investment Case for Gold – an asset class apart
The yellow metal continues to breach its high (YOY) since 2001 till date.

Past Performance may or may not be sustained in future.
The above table and graph gives an illustration of the performance of Gold on the basis of historical data till 10 August, 2011, if invested directly. The same should not be construed as an indication, promise, guarantee or a forecast of any returns. The details may not necessarily provide a basis for comparison with any other investment avenues. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. Source: Bloomberg, Gold (USD/Oz)

The graph above shows the open, close high and low from 2001 till date. The figure in the graph indicates the high level of gold prices for each year.

The gold prices have risen for 10 consecutive years driven by recovery in key sectors of demand and continued global economic uncertainty. Moreover there is a mismatch in demand and supply of gold with the declining trend of official sector sales. In fact for the first time over two decades, the official sector is set to record net inflows in 2010 (Source: World Gold Council).

The performance of gold has not only been strong, but its volatility also remained low, providing a foundation for a well diversified portfolio.Asset allocation with gold aims to provide an opportunity to enhance and stabilize returns over a period. World Gold Councilalso has shown that adding gold to a portfolio tends to increase risk   adjusted returns and protect performance. In other words, by adding a gold allocation of between 2% and 10%, an investor can obtain a desired expected return while incurring less risk than an equivalent portfolio without gold (Source: World Gold Council). Gold as asset over centuries has maintained its value against inflation and considered a hedge
against inflation

From being an alternative investment option, gold has gained the status of ‘must have’ in any portfolio


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