Gold funds emulating the performance of gold have been the worst performing asset class over the last one year. While equities come on top and the Sensex at the Bombay Stock Exchange rose by over 33 per cent in the last one year, gold funds saw their returns shrink by an average of over 15 per cent in same period placing it at the bottom of the table. The net asset value of all the gold funds managed by mutual fund houses is trading at a 52-week low and importantly most of them are trading below their NAV values at the time of their launch. It is also for the first time in 14 years that gold has generated a negative return in a calendar year as the year to date prices of gold are down by over 12 per cent. While a significant decline in the prices of the yellow metal may seem as a good opportunity to invest and capitalise on the low prices of gold and at low NAVs of gold funds, experts point out a near term bearishness in gold and suggest that entry into gold only makes sense for those who are willing to invest for the long-term and not for those who want to make some quick money.
An ascending dollar has put pressure on gold globally. The improvement in prospects for US’ economy has strengthened the dollar and as the dollar index hit a seven-year high last week, it put further pressure on the precious metal. Since gold traditionally has an inverse relationship with the dollar, a rising dollar has forced investors to move out of the metal and into the currency thereby resulting in a sharp decline in gold prices globally. Internationally, gold prices have fallen by more than 35 per cent over the last two years. Even in India, on Friday, price of standard gold fell to a level of Rs 25,500 per 10 grams — its lowest level in over 17 months. Going by the rising dollar trend and expectations of its further strengthening on account of expected hike in interest rates in the US by the Federal Reserve by the middle of next year, in all likelihood, gold may continue to remain under pressure in the near term and it may not be a bad idea to start investing in it.
“While long-term investment makes sense, the short-term prospect of gold is not positive and therefore investors who are looking to make short-term gains should not get into it. A look into the performance of various asset classes over the last 12 years shows that different assets performed at different times and one does not know when the cycle may turn in favour of a particular asset class. Investors should therefore not look to time the market and start investing,” said Sundeep Sikka, CEO, Reliance Mutual Fund.
Price fall may lead to a surge in demand
Generally gold demand in India is price elastic, which means that when the prices come down, Indians line up to buy gold and with the marriage season approaching, demand for gold is set to rise. Lakshmi Iyer, head of fixed income and products at Kotak Mahindra AMC points out that while demand may pick up on account of the falling prices and the approaching marriage season, investors should not expect a rebound in gold prices in the immediate future.
“Investors can’t wish away gold at any time from their portfolio as it is the last man standing when everything is going down. While investors can invest up to 10 per cent of their asset into gold, they should not expect euphoric returns as seen in the past and the investments should be made with reasonable expectations,” said Iyer.
A recently released report by CARE Ratings also outlines that gold may get some support from a rise in demand from China and India.
“Increased buying from China and India could provide some cushion for prices. Gold markets could also get some support from higher physical buying at lower prices and from investors who seek portfolio diversification. Nevertheless, the metal is unlikely to see a significant resurgence in demand and the price in the near term is likely to hover around the $1,200/ounce range with a downward bias,” said Madan Sabnavis, chief economist, Care Ratings.
Gold ETF is the way to invest
Exchange traded funds are investment funds that are traded on the stock exchanges. In case of gold ETF’s, mutual fund companies invest in gold bullion and thus the ETF tracks the market price of gold. Over the last one year there has been a significant dip in gold prices which has brought the NAV value of gold funds even below their launch value and so those who missed on investing then, may utilise the opportunity available now. It is like the shares of a bluechip company trading below their IPO value and it opens up a good entry point to invest in them.
In India, gold buying in the physical form, especially jewellery, is inevitable. However, those looking to invest in gold for the long-term should avoid doing so in its physical form — either jewellery or bars and coins and instead go for it in its electronic form i.e. exchange traded funds. In case of jewellery purchase, while there are concerns around the purity of gold, investors also lose out on the making charges and other charges that may go up to 20 per cent. Also, while buying gold coins and bars from banks, the cost rises by around 10 per cent on account of brokerage, assaying cost etc. The issue with such purchases is that at the time of liquidation all the additional costs are non-recoverable along with issues of storage and security of the same.
In case of gold ETFs, there are no issues of purity and also the annual expense ratio amounts between 0.5 and 1 per cent which is significantly lower than the cost in case of other forms of gold investing. Additionally, ETFs can be easily liquidated since they trade on the exchange which is not so easy in case of coins.
“Through the ETF, investors can accumulate gold in a disciplined manner every month and it is a cost-efficient way of investing in gold,” said Sikka. While a demat account is required to invest in gold ETF, those who do not have a demat account can invest in Gold fund of fund schemes which do not require the need of having a demat account.