Gold most volatile asset class in 11 months; stocks and bonds fluctuate too

Written by Devangi Gandhi | Mumbai | Updated: Dec 6 2013, 15:23pm hrs
GoldGold & equities have been the most volatile asset classes among primary investment avenues in the last eleven months.
Gold and equities have been the most volatile asset classes among primary investment avenues in the last eleven months. Although oscillating views on the tapering of the US Federal Reserves quantitative easing and the sharp swings in the rupee affected all asset classes, gold has been the most volatile investment this year, shows an FE analysis.

To capture the volatility, we compared the daily swings in the benchmarks representing these investments as a percentage of the previous days closing price. For arriving at the daily swing, we took the difference between the days high and low for that benchmark.

Based on this, it was observed that in the year so far, on average the daily trading range of gold was (1.5% of the previous close) wider compared to that of the Sensex (1.3%) and the bond market as represented by the 10-year government bond yield (1%).

According to experts, the sharp moves in the international price of gold, combined with the swings in the rupee, lead to unnaturally high levels of volatility in domestic gold markets. Even restrictive import measures have added to price swings as premiums to the lending price vary from 5% to 8%, depending on the demand scenario, said an industry analyst.

For example, after rallying from $1,200 an ounce to $1,417 an ounce, or 18% between June and August, global spot gold prices have recently retreated to $1,230 a decline of 13%. Although domestic MCX gold futures followed the same trend, the swings were of different magnitudes. In the first leg, domestic prices went up by 31% to R32,940 per 10 gm and subsequently corrected 7%. Volatility in domestic gold prices was the steepest in August, when the import duty was hiked to 10% along with imposition of stringent import restrictions.

Since May this year, the bond market a relatively less volatile segment has also shown sharp swings due to sudden changes in the RBIs liquidity and interest rate policies in response to a weakening currency. Global and domestic factors have together led to daily swings in the benchmark bond, going up to 0.9% over the previous close in May compared to 0.5% in the previous months.

In August, bond market volatility intensified further with strong outflows (close to $9 billion in three months to August) and the RBIs decision to raise short-term interest rates by 200 basis points. The rupee's fall to an all-time low of 68.85/$ in August 2013 also added to daily swings in benchmark bond yields, which saw an average move of 2.2%. Interestingly, the sensex also saw a similar average swing of 2.2% during the month.

Going ahead, talks of a tapering in the Fed's quantitative easing programme, political developments ahead of the 2014 general elections and incoming economic data are likely to impact volatility across asset classes, say experts.

Expectations around the inflation and fiscal deficit have pushed the benchmark yield to above 9%. This scenario is expected to sustain for the next six months till the outlook on parameters improve, said Mahndra Jajoo, CIO-fixed Income, Pramerica Mutual Funds.