Macro-economic factors still support gold as safe-haven asset

By Chirag Mehta - Fund Manager Quantum Gold SAving Fund

Gold prices saw a sharp sell off during the month of June 2011, but ended with an 11th consecutive quarterly gain. However, with the authorization of an austerity plan which involved budget cuts and asset sales to reduce the crisis in Greece, and to qualify for the bailout made by Greek lawmakers, Gold prices slumped as a safe-haven appeal at the end of the month.

Also, markets exited the US Federal’s bond‐buying program and since then, the Central Bank is yet to come up with additional monetary stimulus. Thus, with the plans of rescuing Greece from its crisis and with the end of QE2, gold was prone to a speculative sell off on lack of triggers to pull gold prices higher.


As measured by the London AM Fix, gold prices declined by -1.9% for the month. However, for the quarter ended June 2011, it’s prices increased by +4.9%.

Mixed set of economic data and the ongoing sovereign debt issues in the Euro zone led to increased volatility in the dollar and hence affected gold prices as well. The gold sell off began after the Federal Reserve's Open Market Committee (FOMC) meet boosted the dollar as Federal chairman, Mr. Bernanke avoided indications of future easing measures and commented favorably for the dollar. Additionally, efforts by Greece to stave off the Euro zone’s first sovereign default led to further selling. These factors along with technical selling aggravated the decline of gold prices.


Gold Outlook

The correction in prices coincides with the seasonal slack in demand. However, if the price falls further, we can expect gold purchases to emerge from traditional consumption centers despite the seasonal slowdown. Demand in India has been growing at 10% to 11% over the last year which in itself was a record year. China’s demand for gold will grow by at least 20% this year and is expected to double in the next two years, said Zhang Bingnan, deputy chairman of the China Gold Association. A key reason for a correction in gold prices is the long-term fundamental change in emerging markets as wealth increases and inflation stays high.


Outlook:
There does not seem to be much change for gold in terms of fundamentals. The sovereign debt issues have not been solved but instead, the possibility of a solution has been postponed by bailing out Greece as policymakers unveil one more rescue package. While it is a positive sign that austerity measures have been demanded along with the bailout, it is yet to be seen how much of it really materializes. Also, the US has avoided quantitative easing measures this time around but it has neither increased rates nor announced any exit strategies. It also remains to be seen until how long the Federal can keep up with this muted stance.


There could be a correction in Gold prices in the short term if the dollar appreciates further, and this could be an opportunity to buy gold. Gold is being seen as a currency and the macroeconomic factors still lie in favor of gold, making it stronger as a safe haven asset. The global economy is highly fragile amidst high risks, especially with the sovereign debt issues because of which investors are increasingly losing faith on paper currencies and are leaning towards gold as a security as they diversify from the paper money.


An outlook on gold by Australian Government agency, Australian Bureau of Agricultural and Resource Economics (ABARE)

Gold may climb 23 percent to average $1,500 an ounce this year, up from a March prediction of an 8 percent gain, because of concern over global budget deficits and inflationary pressures, an Australian government agency said. Prices may advance a further 3 percent in 2012 to average $1,550 an ounce, the Australian Bureau of Agricultural & Resource Economics & Sciences said in a report.


The report cites the following reasons that would buoy gold prices higher:
-Uncertainty about the ability of many developed economies to stimulate economic growth and control growing budget deficits is expected to encourage investment demand for gold as a lower risk or safe haven asset.


- Emerging inflationary pressures in some developing countries such as China and India, could also support demand.

- Investment demand for gold is likely to benefit from the perception that its value is eroded less by price inflation than are the values of other asset classes.

Gold demand from risk-averse investors is expected to remain strong as political and social unrest continues in some parts of the world, particularly the Middle East.

Investing in Gold ETF

Gold is seen as a symbol of security and a sign of prosperity. Indians regard gold jewellery as an investment and are well aware of gold’s benefits as a store of value. Gold is also recognized as a form of money in India, a tradable liquid asset.But now increasing rates of Gold has make it more like a good  investment avenue.

It is one of the foundation assets for Indian households and a means to accumulate wealth from a long term perspective. Gold investment has been in the culture of Indian tradition and has been on rise amongst the modern investors as well due to the financial uncertainty and inflationary pressures.

Increasing rate of Gold has made Gold out of reach of many buyers, so in order to boost investments in Gold many AMC's are launching Gold saving funds, Gold ETF's with SIP options.

Anil Ambani group firm Reliance Mutual Fund launched a new Gold Savings Fund, a first-of -its-kind investment scheme focused on gold, to tap a market that it expects to become bigger than even equity mutual funds.
The new fund, which is different from gold ETFs (Exchange Traded Funds) that require subscribers to have a demat account, will also offer investors the option to invest as little as Rs 100 per month, the company said here.
The company said that its Reliance Gold Savings Fund will enable investments in gold without any locker or demat account -- a first in the country.

NOt only Reliance, but KOtal Mahindra also have launched Gold ETFs, main purpose of these GOld saving funds is to generate revenue for Gold Fund of Funds.

A "Gold Savings Fund" (also known as a "Gold Fund") is generally Fund of Fund (FoF) scheme which invests its corpus into an underlying Gold ETFs and benchmarks its performance against the physical prices of gold. Hence by doing so, it attempts to provide returns that closely correspond to the returns of its underlying Gold ETFs.

Gold is really a precious asset class to invest especially in current global unstability.

However, there is one concern with Gold Saving Funds and that is double charges.

i.e  when someone invests in Gold Saving Funds, the charges doubles. This is because its Gold FoF.

So the investor will not only pay the Fund management charge of Gold Saving Funds but also pay the charges for those Gold ETFs in which Gold Saving funds invest.

Yes, an investor investing in gold savings fund will have to bear both the charges, the fund management charge as well as the charge of the gold ETFs. But in return, a gold savings fund would enable you to enroll for SIP. Hence, in the long run the impact of the charges will be very negligible.

Read more information on Gold Saving Funds