What next for gold investors?

The yellow metal may continue to be volatile, but long-term investors can still buy

The gold fever is back. The yellow metal has been climbing over the last few weeks. With tensions in North Korea, speculative bets on the metal increased. Trump’s concern over the strong dollar which took some steam away from the currency has also helped the metal. But still, if we see the one-year returns chart of gold, it is hardly inspiring. Even as equities put up a stunning performance during the last one year with returns exceeding 30 per cent, gold’s return stands at 3 per cent in dollar terms and at a little over 1 per cent in rupee terms.

If you are one of those who bet on gold last year, you must be wondering why the metal let you down.

So, should you continue to park some money in gold? What are the suitable instruments? Here are some answers.

Why the underperformance

Gold prices which hit a high of $1,375 in July 2016, dropped to $1,135 by December, mainly due to positive set of economic data from the US. Initially, the victory of Donald Trump in the US presidential election (in November) gave the yellow metal a shot in the arm, but as the markets turned positive about Trump’s victory, the metal lost its sheen again. On December 14, as the Federal Reserve increased the policy rate by 25 basis points, gold dropped to a 10-month low of $1,122/ounce, much to the dismay of bulls. But the metal started moving higher post the rate hike. Beginning March, as expectations rose again about a rate hike from the Fed, the metal slipped, this time to as low as $1,195/ounce (March 10). The central bank did a 25 basis points hike on March 15. Since then, dollar has cooled off and the yellow metal has been inching up again.

For Indian gold investors, the strong rupee also played spoilsport. The rupee appreciated against the US dollar — from 66.4 to 64.28 — stunting returns from gold. The price of 10 gm gold as per the MCX Spot Gold index is currently at ₹28,845, compared to ₹29,080 last April; down about 1 per cent.

Sovereign gold bonds

While the overall interest for gold was poor in 2016, there was some attraction for the Centre’s new gold instrument — sovereign gold bonds. This included an additional coupon on the face value of investment (2.75 per cent and 2.5 per cent in the last two tranches) and capital gains tax exemption if held till maturity. In the last two tranches, there was also a discount of ₹50 on the face value of the bond for investors.

There have been seven issues of the bond so far — one in 2015, five in 2016 and one so far in 2017. Excluding the latest issue — the numbers for which are not available — these bonds have collected ₹4,127 crore or 14 tonnes of gold. Investors who bought these bonds in the first two tranches did make money.

From the issue price of ₹2,684 (in November 2015) and ₹2,600 (in February 2016), the price sky-rocketed to ₹3,200 in September. But investors who entered in later tranches have been stuck. The third, fourth, fifth and sixth tranches of the bond now trade at a discount of 5-10 per cent to the issue price.

Now, investors who have been wanting to exit these bonds are looking at the secondary market. Data from the NSE and the BSE show that investors who hold 1,000 units or more may find it difficult to sell their holding at one go.

The average daily volume in the VI tranche of the bond on the NSE, for instance, is just 100-200 units.

Gold ETFs

Sovereign gold bonds have stolen the sheen from Gold ETFs. Since last April to March 2017, there has been an outflow of ₹775 crore from these funds. In 2015-16 too, these funds saw an outflow (of ₹903 crore). All the 14-odd gold ETFs in the country may be holding less than 20 tonnes of gold now.

In 2012, these funds held about 35 tonnes of gold. The Reliance ETF Gold BeES — the largest gold-backed ETF in the domestic market and the most liquid — trades at about ₹2,621 (on April 10) in the market and its NAV is ₹26,32. The market price is at a discount to its NAV, indicating poor demand from market participants. This ETF’s return has been flat in the last one year.

Our take

Gold may continue to be volatile in the current year as well, as the Fed continues with monetary tightening. If you are a short-term investor, you may have opportunities this year too to make some quick buck — if you pick it up in the correction before the rate hike and sell it post the event, you can make 10-12 per cent returns.

Long-term investors can still buy gold. The fundamentals are good given the shrinking exploration budgets of gold companies and falling discoveries of high-quality deposits.

But since the US has just begun its rate hikes and there are uncertainties around Trump’s policies, we suggest you accumulate it in small amounts. For those with a large equity portfolio, it is a good ‘portfolio diversifier’.

About 5-10 per of the portfolio can be in gold, maybe in the form of sovereign gold bonds. If you already hold gold bonds, do not sell them in the secondary market before maturity, unless you are in a fund crunch.

There are good chances that the price could run up by maturity, which is seven to eight years away. If you have gold ETF units, sell them and shift the money to sovereign gold bonds.

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