- Alpha Alternatives
Gold A Valuable Asset Class?
A week ago we had a very interesting and highly informative session in association with Kotak Wealth Management on 'Role of Gold as an Asset Class'. The power packed panelists shared some really insightful data and their take on the same. On the panel were Arvind Sahay, Chair, India Gold Policy Centre, IIMA, Prakash Shah, Precious Metal Trading – Asia Pacific, Deutsche Bank, moderated by Mrugank Paranjape, Senio Patner – Alpha Alternatives & Former CEO, MCX India. We have some really interesting takeaways from the webinar.
Gold’s Supply Vs Demand Analysis
The supply side has slowed down
Mining is the only way to extract Gold & we have mined ~78% of known gold resources.
Gold mining production from the largest producers has actually taken a turn to the downside
Some of the new mining operations in Australia have picked up but the overall trend is that of reducing output over a longer frame of time
On the demand side, Gold has several avenues – Jewelry, Safe haven investments – Bars & Coins, Central banks, ETFs, etc.
Also, Gold has emotional, cultural and financial value and different people across the globe buy gold for different reasons, often influenced by a range of national socio-cultural factors, local market conditions and wider macro-economic drivers. A majority of the Gold once used is also recycled.
It’s in the Cultural tradition of gold being pushed by Family & Jewelers as something so be passed along generations. So, as long as the jewelers push this & keep up the mktg to keep this tradition alive, gold will continue to be bought as jewelry purposes – Entry level 14K Jewelry @3500 makes it easily affordable & the tradition continues
One interesting observation was that Titan’s Gold jewelry sales are back to where they were last year.
Two Major events which can impact gold prices in near future is:
Gold-backed ETFs and similar products (gold ETFs) recorded their tenth consecutive month of net inflows during September, Gold ETF holdings increased by 68.1 tonnes (t) (US$4.6bn) or 2.0% of assets under management (AUM) despite gold’s worst monthly price performance since November 2016. People are buying more as prices cool off indicating strong demand and supporting the prices.
Gold vs other Precious Metals
Most of the other metals are used for more industrial purpose and hence demand is not that much also liquidity is a challenge.
It’s only for Gold that the market is so liquid that you can purchases 100 Tn of Gold in a day, it’ll take weeks to gather Platinum at similar quantities. Not something Non Institutional players can indulge in
In 2008, Platinum was trading at ~$1800 w.r.t gold at ~$800
In 2020, this has reversed with Gold at ~$1800 & Pt at ~$800
The fall in Prices of Pt & other precious metals are driven by industrial usage demand.
-The Stringent Euro -4/5/6 pollution norms resulted in automakers favoring Palladium instead of Platinum for their vehicles hence drop in price
How does stimulus affect gold price?
More money in the system results in Fiat currency losing its value over time.
This is good for gold as people will rush towards stable assets & hence will propel Gold prices higher
Something that will help you make your investment decisions.
Role of Gold as asset allocation
Some of the risky investors can have around 15% gold allocation, but others can have 5-10% allocation in gold
On the deployment strategy, the view was to deploy 5-10% before US election as it’s a major macro event.
Format to invest in gold depends entirely on the time horizon being considered. Panelists were in favor of the following:
6m – 3Y | ETF (Very low charges – no hassle of safety)/Physical Gold
5Y=> | SGB as they also give 2.5% coupon with other price related risks remaining the same
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