Gold - Probably the only asset class with no sovereign risk

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GOLD AS an asset class has been one of the best performing asset classes in the last decade due to investors' preference for physical assets, in a world awash with liquidity. It has delivered positive return (USD terms) in every single year during the last decade and has managed to outperform other asset classes over various longer term time frames.

 

Precious metals, especially Gold, for long has been considered a store of value, hedge against inflation and also one of the best bets in uncertain economic environment. Given the low correlation of Gold with other asset classes it acts a good diversifier in the portfolio. We firmly believe that Gold always acts as an insurance against policy makers losing control of fiscal and quantitative monetary policies.

Gold, ultimately being a commodity, the basic factor influencing the price movement is the demand - supply equation. While there have been various factors which have resulted in increased demand for the yellow metal, the supply has however been stable or lower due to the limited resource availability. Owing to this, Gold has not lost its value over a period of time and becomes an important asset as a hedge against inflation.

Gold has an inverse correlation with currency, especially US Dollar. A weakening US Dollar would result in the Gold prices moving higher and vice- versa. Globally, apart from the jewellery demand, factors such as, higher level of economic insecurity, low interest rate in most countries around the world creating huge liquidity, inflation expectations and risk aversion have resulted in huge demand creation for the yellow metal in recent years. Currency debasement has emerged as a key issue in recent years due to the unabated currency printing by many developed economies and has resulted in various central banks allocating part of their reserves into gold. Central banks that were once the biggest suppliers of Gold, have now tilted towards buying it.

Historically, we Indians have been the largest consumers of gold, the demand partly being driven by jewellery needs and partly as investment requirements.

Since the option of investing in gold in a non physical form was not available earlier, people have been investing in the asset class by way of buying jewellery/ bars/ coins etc. Now, with the availability of an option to invest in Gold via an ETF or Fund of Fund, people have the convenience of investing in Gold in a non- physical form.

Gold ETF / Gold Funds are passively managed mutual fund schemes which aim to provide investors a medium of participating in the Gold bullion market without taking physical delivery of Gold. These products aim to provide returns that closely correspond to the returns provided by physical Gold, subject to tracking error.

We believe that the fundamental/ base drivers for Gold prices ( over and above the jewellery demand) such as Sovereign Debt crisis, Easy liquidity, Global economic uncertainty, Risk aversion, Higher Inflationary expectations etc., still remain in place and make a case for portfolio allocation towards the asset class, subject to individual's investment objective, risk appetite and time horizon.

Having said that, one should always be cognizant of the fact that the rally in Gold prices over the last few years has been greatly supported by Investment demand (ETF's globally) and by its virtue, correction (profit booking) would always be a part of the same.

Historically, we Indians have been the largest consumers of gold, the demand partly being driven by jewellery needs and partly as investment requirements

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