Big Picture . Will gold’s time aayega?

India’s love for gold has been losing its sheen. Over the past decade, the annual demand for gold jewellery and bars has dropped from about 1,000 tonnes in 2010 to 760 tonnes in 2018.

Sovereign gold bonds (SGBs), which were launched amidst a lot of fanfare, have also seen their demand drop over the years.

After raising about ₹3,451.5 crore in the issues in 2016-17, collection via SGBs dropped to ₹1,872.7 crore in 2017-18 and ₹643.3 crore in 2018-19. For the current fiscal year, there has been no issue of SGBs till date. While an issue is usually opened around Akshaya Tritiya, this year, there was none.

Since the first issue in 2015, a total of 27 SGBs have been issued; they have collected a total of ₹7,285.7 crore, which translates into 24.8 tonnes of gold.

Gold ETFs — the exchange-traded funds in gold run by fund houses — have also been witnessing a drop in assets under management with every passing year. The AUM of gold ETFs dropped from ₹11,648 crore in March 2013 to ₹4447 crore this March. While gold prices in this period were ₹2,800-3,000/gram, investors selling units and taking out money explain the drop in AUM.

The world continues to see increasing geopolitical risks but gold is not drawing any benefit from being a safe-haven metal. Gold prices have been moving in a narrow range, leaving investors who are holding the metal with conviction, puzzled. Across the globe, despite trade wars and fear of global economic slowdown, investors’ risk appetite is still high and they are preferring equity to gold.

The fundamentals in gold are not encouraging. While central bank buying has been strong, demand from consumers in two key markets — India and China, which contribute a large chunk to the annual demand for the metal — is nothing to write about.

In 2018, consumption demand for gold in India dropped 1 per cent y-o-y to 760 tonnes and in Greater China, it was up just 3 per cent to 1,058.3 tonnes. For the first quarter of 2019, China’s demand slid 3 per cent over the same period last year, while India’s was up 5 per cent

It is doubtful if India’s consumption demand will sustain, given the rising gold prices on a weak rupee and the poor monsoon outlook.

Investment demand for gold, too, has been sagging. In 2018, the net inflows into gold ETFs globally was only 69.3 tonnes, a drop of 66 per cent over the previous year. In the first quarter of 2019, gold ETFs did see some good inflows, but there have been outflows from these funds over the last few weeks.

Supply in gold, on the other hand, has been rising. This is despite new gold deposit discoveries getting rarer and rarer. Mine supply has risen at a CAGR of 3 per cent over the past eight years. In 2018, total mine production was 3,502.8 tonnes, up from 3,441.8 tonnes in 2017 and 2,748.5 tonnes in 2010.

Lacklustre returns

Gold prices have been moving in the $1200-1300/ounce band for last five years, and the long-term return track record of the metal is poor. The five-year compounded annual return of the metal measured in USD has been 1.6 per cent. The 10-year CAGR has been 1.57 per cent and 20-year CAGR, 7.8 per cent.

For Indians, the weaker rupee helped gold’s value grow. In rupee terms, the five-year CAGR in gold has been 3.3 per cent and 10-year CAGR, 6.5 per cent.

However, returns still have not been covering even inflation. In comparison, equity markets have been delivering handsome returns. The five-year CAGR in equity funds (large-cap) has been 12.73 per cent and 10-year CAGR, 13.28 per cent.

Gold may gain its lost lustre if the tide turns for equities, and given that paper currencies will only see their value erode with time, it makes some sense to invest in gold. Investing a portion of your portfolio — say, 10 per cent — in gold, is still not a bad idea. For Indian investors, buying SGBs in the primary market or gold ETFs listed in bourses are an option.

SGBs can be bought in the secondary market, too, but it’s currently a challenging process. Being a government security, inter-depository transfer has not been happening in SGBs. Despite RBI allowing it, depositories haven’t sorted out the operational challenges. If a client buys these bonds online, and the broker gets the credit in his pool account with NSDL (National Securities Depository) but the client has his/her de-mat account with CDSL (Central Depository Services), the units cannot be transferred. Some brokers let clients buy SGBs online only if they have both NSDL and CDSL de-mat accounts.

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