Gold prices at 11-month high: Which gave maximum return - physical gold, bonds or ETFs?

When Kim Jong-Un, the Supreme Leader of North Korea, pressed the button that detonated a hydrogen bomb last fortnight, gold traders around the world must have rejoiced. Gold usually does well during geopolitical turmoil and the current crisis over Korea’s nuclear capability has boosted the prospects of the yellow metal. International gold prices breached the psychological barrier of $1,300 and touched a new 11-month high of $1,335 last week.

Gold has gained more than 9% in the past two months, and 17% in this calendar year.

Will the rally continue? Most experts don’t expect a big upmove from current levels. They believe a lot of the news has already got priced in. Gold has gained more than 9% in the past two months, and 17% in this calendar year.

Gold is rallying but the dollar has slipped

Gold prices shot up after the Korean crisis, but the dollar slipped on fears of a nuclear strike on US.

Domestic gold prices have risen smartly

Gold may remain relatively stable because all the positives have already got priced in.

Geopolitical concerns

There is no telling what will happen next in the ongoing tussle between US and North Korea. “If the crisis in the Korean peninsula continues, we might see international gold prices inching higher towards the $1,360 mark,” says Prathamesh Mallya, Chief Analyst- Non-Agri Commodities & Currencies, Angel Commodities Broking. This also means that prices could crash if fears of a military strike recede.  “The geopolitical risk is already in the price. Gold will see an immediate correction if the Korean peninsula crisis ends,” says Lakshmi Iyer, Head of Fixed Income and Product, Kotak Mahindra Mutual Fund.

Weakening dollar

Other factors are also propping up gold prices. A weakening dollar, the Federal Reserve not increasing interest rates and concerns about the Trump regime are likely to keep gold prices at elevated levels. “We expect gold prices to remain range-bound with an upward bias in the coming months,” says Hareesh V, Research Head, Geofin Comtrade.

Since international gold is dollar denominated, gold and dollar share an inverse relationship. Weakness in the dollar pushes up gold prices and vice versa. Dollar has slipped against major currencies and experts don’t see any let up on that front. A rate hike by the Federal Reserve is the main factor that can strengthen the dollar. But it is getting postponed again and again. “The US Fed is not expected to hike rates in the coming meeting, but some action is possible before the year end,” says Arun Singh, Lead Economist, Dun & Bradstreet India.

Rupee has appreciated against the dollar

The rupee is expected to remain range-bound around 64-65 against the dollar in the coming year.



Tarun Satsangi, Head-Commodity & Forex Research, Globe Commodities, thinks that the chances of rate hike in December is also low. “In its latest annual Jackson Hole meeting, the US Fed chairman declined to comment about monetary policy. So there is dim hope for a rate hike in December,” he says.

Conflicting economic signals by the Trump administration and the worry on how long he will be able to sustain is another factor keeping the dollar at lower levels. More importantly, the dollar may behave differently this time. “The dollar usually rallies during geopolitical crisis, but this time North Korean missiles can reach the US mainland,” says Singh.

Gold demand remains low

Investment demand for gold also needs to pick up for prices to rally. World Gold Council (WGC) data shows that gold demand slumped 14% to 2,003.8 tonnes in the first half of 2017, the lowest level in eight years. Traditionally, there is an upsurge in jewellery demand during the festive and wedding seasons, leading to a price rally. However, this year, the introduction of GST has hit the jewellery industry. “There has been a slowdown in the demand post GST,” says Navneet Damani, AVP, Commodity Research, Motilal Oswal Commodities. Others agree. “GST is a major transparency measure. Since a large part of the gold jewellery industry is still in the unorganised sector, the industry may take 12-18 months to settle,” says Somasundaram PR, Managing Director-India, WGC. The crackdown on black money has not helped either. Cash deals above Rs 2 lakh are banned, which has hit demand badly. This Rs 2 lakh limit is per day and also per bill. “If the bill is Rs 3 lakh, the buyer can’t pay Rs 1 lakh a day,” explains Hasmukh Bafna, President, Gold Chains & Jewellery Wholesalers Welfare Association.

Gold demand has not picked up significantly
Traditionally gold demands picks up in the second half, but that may not happen this year due to GST-induced bottlenecks.



Some jewellers tried to encourage buying small quantities of gold per day to avoid the Rs 2 lakh cash limit. But the government plugged this loophole by putting jewellers under the Prevention of Money Laundering Act (PMLA). This means jewellers must now do a KYC check for cash deals of Rs 50,000 or more. Since this involves taking copies of PAN and Aadhaar, splitting large purchases into smaller ones is difficult. The rural demand is also expected to be lower this year. “The adverse weather conditions could impact crop production in many states, which in turn would impact farmers’ income and depress gold demand from rural India,” says Manoj Kumar Jain, Director, India Nivesh Commodities.

Impact of rising rupee

Though international gold is close to its 52-week high, domestic gold price is yet to reach that level (see chart) because of the rising rupee. The rupee has strengthened from nearly 69 to almost 64 in the past nine months. But experts don’t expect this trend to continue for long. “Though it might appreciate further in the short term due to continued money inflow, the rupee is a bit overvalued on real effective exchange rate (REER) basis. So it may remain between 64 and 65 during the next one year,” says Singh.

Physical gold has given better returns
Even if the interest paid on the gold bonds is taken into account, the returns are lower than those of physical gold.



* Last day of investment considered as issue date
** Last price of SGBs and Spot Gold 995 - Mumbai as on 31 Aug 2017.
Source: NSE. Compiled by ETIG Database

Import duty high, may be cut

One worry for investors is the high import duty of 10% on gold. It has kept gold price at high level, but if this duty is cut, prices will fall. Analysts don’t see this scenario in the near future. “There is no possibility of duty cut on gold as the government wants to promote its Sovereign Gold Bond scheme and doesn’t want to lose revenue,” says Jain. Iyer agrees. “The probability of gold import duty coming down is remote, especially since there was a spike in gold imports recently,” she says.

Sovereign gold bonds have underperformed

Gold bonds suffer from low liquidity in the secondary market. Most bonds are quoting at a discount to the issue price.



Technical view Analysts also feel that with gold prices having crossed $1,300 level, there is limited upside from here on. “It could reach $1,3551,375, the previous year’s high during the US presidential election in November,” says Satsangi.

Is it time to buy?

Much depends on whether you are an investor or hedger. Given that gold prices are not expected to move up significantly from current levels, investors should wait for a correction and get in only after a meaningful dip. “Gold is a good buy near $1200/ounce or Rs 27,800, where investors can start accumulating,” says Satsangi. However, the situation is different for hedgers who want to keep a part of their portfolio in gold as protection against unknown events. In addition to geopolitical risks, the relatively high valuation of equities is attracting investors to gold now. “Gold has negative co-relation to equities and since equity valuation is high now, it makes sense to increase your gold holding, to at least 15% now,” says Nitin Agarwal, Co-founder, Oro Wealth. “Since the equity valuation is placed above its long-term average, investors should keep gold at the same level or increase their holdings,” says Manoj Nagpal, CEO, Outlook Asia Capital.

Physical gold, gold ETF or bond

If you want to invest in gold, there is no need to buy jewellery because it involves making charges and other incidental expenses. This means those who wish to invest in physical gold should go for gold bars. However, GST has complicated the situation. While a jeweller will charge you 3% GST on a gold bar, he will not compensate you when you sell it back. This is in addition to the premium the jeweller may charge at the time of selling and the discount he may demand when he buys it back. However, gold bars have some inherent advantages. “In a real sense, insurance against unforeseen circumstances can happen only with physical gold and not with paper gold. This is because if the financial market is shut, liquidity for your paper gold will be zero,” says Nagpal.

Theoretically, sovereign gold bonds issued by RBI are the best because they also offer additional interest for holding gold. But investors are not enthused because SGBs have very low liquidity in the secondary market. Most SGBs are trading below the gold price. Even after adjusting for the interest received, SGBs underperformed gold by around 10%.

Gold ETFs also gave poor returns

Some ETFs have generated significant losses even though gold prices have remained flat in the past one year.



* As on 4 Sept
Compiled by ETIG Database

“This discount is due to low liquidity. It will continue till the government appoints market makers for these bonds,” says Nagpal. As of now, there is no plan by the government to appoint any market makers. However, gold bond remains as a good option for long-term investors who are ready to hold for at least five years, when they can be redeemed. “If you can get SGBs at a discount, it makes sense to buy from the secondary market. However, keep in mind that the volume traded is low and price may move up if some large buy order comes,” says Agarwal. Gold ETFs, on the other hand, are meant for investors who want regular liquidity. However, not all gold ETFs command high liquidity. This explains why some gold ETFs have generated significant losses during the past one year when gold prices remained flat. Investors should remain with highly liquid ETFs such as Reliance Gold BEES. Investors also should keep in mind that there is an annual expense of around 1% per annum and therefore, the return from these instruments will always be less than the movement in the prices of the yellow metal.

SOURCE:
http://economictimes.indiatimes.com/wealth/invest/gold-prices-at-11-month-high-which-gave-maximum-return-physical-gold-bonds-or-etfs/articleshow/60435654.cms