The spring is back in gold's feet and gold funds have beaten stocks and debt peers. In the year to date ended May 3, gold funds on average gained 20.85 per cent. The average loss for a large-cap fund is 2.3 per cent in the same time period. Is this unexpected rebound in gold sustainable?
The argument for investing in gold is simple: a great tool for portfolio diversification. With gold being a risk-off asset, any downside in equities makes the precious metal more appealing. It is usual for gold bugs to eye the precious metal ahead of festivals like Akshaya Tritiya. However, domestic gold prices are also dictated by global trends and currency movements.
Gold futures touched $1,299 last week on the Comex in New York, the highest since January 2015. Slowing U.S. growth and the Federal Reserve pausing on rates have helped gold prices. The Bank of Japan's stimulus policy has also weakened the dollar, boosting the appeal of gold.
Gold prices in Mumbai earlier this week shot up to hit the psychological ₹30,000 level, a fresh two-year high. This has meant that gold funds have got back a bit of their mojo. ETFs provide returns that closely correspond to physical gold. Gold funds today (on May 3, 2016) have a one-year return of 8-11 per cent, at a time when stock benchmark Sensex and Nifty have dropped by 5.25-6.5 per cent.
However, there is merit in not being carried away by gold's recent spurt. Gold is not a very useful asset to invest in. For the five-year period ended December 31, 2015, 10 gold fund products gave a measly return of between 2.83 per cent to 3.07 per cent. In calendar year 2015, gold prices dropped by 5.6 per cent. 2014 was another down year. In 2013, gold prices declined by 4.5 per cent after an over decade of positive returns for each year since 2001, according to data from Morgan Stanley Investment Management. Not only Indians' deep faith gold being a great investment not going away, it shows every sign of growing steadily. Dhirendra Kumar, founder and chief executive, Value Research, says the fact that gold's actual returns are quite poor is relatively unknown. "Gold prices tend to get compared over the long-term, without any sense of what an annualised rate of return is and how it compares to other investments," he commented.
Fund managers say that after seeing a good upmove in the last quarter, consolidation is likely for gold. Any improvement in risk appetite may also reduce flows to gold. However, given the global macros, downside in gold would be limited. "Fundamentally, gold seems to be on a solid footing as central bankers have again hit the wall. Gold should benefit as central bankers attempt further measures through more newer, unconventional and untested approaches to revive growth," said Quantum MF.
The rise in gold prices helped gold exchange traded funds, or ETFs, post their first quarterly inflows since September 2013, growing 4.84 per cent, or by ₹292 crore, to ₹6335 crore at the end of March 2016 quarter. Gold prices, as represented by the CRISIL Gold Index, rose over 16% in the quarter.
Investor interest in gold ETF as measured by folios shows an interesting trend. Gold ETF folios at the end of March 2016 stood at 425,914. This is actually a drop from the peak of 453,630 hit in November 2015. In the heydays in 2014, gold ETFs had 5 lakh folios but the numbers started dwindling as equity markets rose in anticipation of the new government.
While gold prices are up, investors in jewellery stocks may not be happy as jewellers reported muted earnings due to a stroke which affected sales. Shrikant Zaveri, Chairman and Managing Director of Tribhovandas Bhimji Zaveri says: "(Our) fourth quarter performance was impacted by the nationwide agitation by gems & jewellery industry in protest against imposition of 1% excise duty on jewellery sales." However, in the past one month (ended May 3, 2016) some jewellery stocks have gained. Tribhovandas Bhimji Zaveri is up 18 per cent, Thangamayil Jewellery is up 9 per cent and Gitanjali Gems is up nearly 11 per cent. Others like PC Jeweller, Rajesh Exports and Tara Jewels are down.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
