PersonalFN is privileged to bring to you Mr.Chirag Mehta, Fund Manager (Commodities) at Quantum Mutual Fund
In an interview with
Quantum Information Services Pvt Ltd (PersonalFN )
Mr. Mehta shares his view on how gold will pave its path during the global economic turmoil and post festive season.
PersonalFN Gold has appreciated by around 28.1% since December 31, 2010 (Rs 20,645) and is now at Rs 26,450. What according to you are the factors which will keep this secular uptrend in this asset class intact?
Mr. Mehta: There are multitude of factors that are driving gold currently. One it comes from its role of being a monetary asset - historically for thousands of years. In that sense gold is also a form of currency perceived by many. And if you see largely in the developed world, what they are doing is creating a lot of money out of thin air; so given that increase in the money supply happening in the developed world - and gold also being a form of currency which is relatively supply constrained in nature, it has to adjust its value if you have to match both - supply increasing at one end and supply not increasing at one end. So gold price has to come up to be at equilibrium, and that’s how a currency’s normally operate. If you print more of a currency, then it would depreciate vis-à-vis other currencies; other things being equal.
Secondly, the developed world has been running into deficits - specially the U.S.; even in boom years it was running deficits. And if you see in the last 3 years, they have created so much of more money - and that it being a reserve currency people are slowly questioning the faith in the dollar. So given that sense, where else would they go? It could be the Euro, but you know Euro is in bigger trouble than the U.S. Swiss Franc? - It could absorb limited amount of capital, and even they are worried about the appreciation of their currency. If you see the recent comments by the Swiss National Bank, it said they’ll intervene as much as they can to prevent the Swiss Franc appreciation. So it’s like a currency war going on; it’s like the U.S. and the Euro zone printing more currency, these guys printing to intervene in the currency market to not let their currency appreciate. It’s like a currency war going on and each round of currency debasement is negating the previous one. So currencies are being debased at will, and in that sense people are preferring to be with gold, which has been a form of money which cannot created or printed like currencies. Also we are living in an era where we are seeing negative real interest rates prevailing, not only in India but many parts of the globe. And in the past, if you see that 1970s and 1980s episode when gold prices appreciated significantly - even in that point of time it was an era of negative real interest rates, inflation was very high, there were loose market policies prevailing globally; so in that sense gold had appreciated - and even we are seeing a repeat of that currently. So even that it is one of the factors which is driving gold currently.
And going forward we are not seeing a solution so far, coming forward solving the crisis that is there in the developed world like lower growth, higher deficits, debt issues, etc.; I think if they find an answer, gold may not rise or may fall from here. But if uncertainty continues (the way it is), people may prefer to go with gold rather than staying onto currencies or somewhere where they are not yielding any real returns.
PersonalFN : You mentioned that gold has been looked upon, as a "currency"; interestingly last some months, FIIs are preferring to stay invested in the U.S. dollar. Thus are you of the opinion that the U.S. dollar is a better hedge than gold to shield one-self from the global economic turmoil.
Mr. Mehta: See in an institutional framework if you see, not many people have exposure to gold - I mean institutional investors like the pension funds or those larger investors. Coming to the fact that they have never had an exposure to gold, its difficult for them to justify allocation to gold. Couple of pensions who have allocated to gold recently also found it hard and took a lot of time to convince their board on their allocation to gold. So in those terms given the institutional framework there hasn’t being much exposure to gold or their willingness to go for gold, because that’s not been a traditional form of investments for them. So convincing on that side, has been difficult for them.
PersonalFN : But given the fact that the U.S. dollar may be devalued in time to for the U.S. lower its burgeoning debt-GDP ratio, do you think then that shift will really happen where pension funds will start looking at gold instead on the U.S. dollar?
Mr. Mehta: I think we are slowly seeing diversification of investments and on the other hand reserves of central bank into gold. We think that it would continue going forward as well, because even what you said that people are looking at U.S. dollars in a dire state, and given the large unfunded liabilities and the deficits they are running, the faith in dollar as a reserve asset has started to dwindle and hence they are preferring gold as a safe refuge given the uncertain times.. And in lack of alternatives available today in currency terms; they will sure look at gold and diversify into gold. So we strongly believe that the theme of diversification of reserves and investments in gold will slowly and steadily pan out in a larger manner.
PersonalFN : So what according to you would be the effect of the global economic turmoil; will gold decelerate going forward?
Mr. Mehta: Gold is one of the assets that is largely not linked with the economic activity, that is why people think it is good effective diversifier to have in one’s portfolio. See if you study last recessions gold has had a mixed response to recessions - largely it has been positive, and sometimes it has also been negative. So in that sense there’s nothing can prove how gold will behave in a recession. But given a recession and what actions the central banks have taken in the past - over the last recessions, and if they repeat the same thing; I think gold will stay on a higher side. Mainly the money printing exercise - they think doling out money, can solve all the economic problems. Like bailing out banks, FIIs and financial institutions was QE1; slower growth trying to revive growth was QE2 - so by quantitative easing they have sought to sort each and every problem that they have. And if they resort to the same action going forward during the next recession, or if we see a recession then I think gold will stay on a higher side; because again they currency perspective will come into play - people will shift (to gold) in order to protect themselves from currency debasement.
PersonalFN : Can you give us some levels, where gold can been seen as an investment and beyond which it could be a speculative asset - any particular price levels?
Mr. Mehta: See if the U.S. goes and prints another trillion dollars gold can go much higher; so its relative depending upon how the other factors pan out. Like there’s more currency debasement going in the Euro zone and the U.S., and other countries intervening to protect their own currency; then we think gold will much higher than what it is today. So, it will all depend whether gold will be in bubble territory or not given what factors that are panning out. So currently, I cannot say that gold at Rs 30,000 or Rs 35,000 will be justifiable at that point of time or not. But currently I am not seeing any bubble developing in gold as yet. I think that the fundamental factors very well support the gold rises that we have seen.
But again from a futuristic level it will all depend upon factors - like if there’s more current debasement, more money printing; gold levels can be justified on a higher level. From a portfolio angle if you see, a person can have somewhere between 10% - 20% of his allocation in gold. And current allocation if you see including institutional investors and everyone, can be somewhere on a conservative basis or on a higher side would be somewhere around 1.5% to 2.0% at best. So if you say it rewards an allocation of 5% or so, still there’s some more room for people to invest in gold; so from that point of view also if people are chasing gold currently it’s not actually - the numbers don’t say that. Also a proportion of financial assets gold is very very minuscule proportion of financial assets prevailing today; so from that angle also not seeing any signs of bubble in gold. It is advisable that people hold somewhere between 10% - 20% (in gold) depending on their risk appetite and investment profile.
PersonalFN : Recently - in the last couple of months gold prices experienced a lot of "see-saw" movement. In the month of September 2011, they experienced a downtrend as the precious yellow metal corrected by almost 8.5%.Do you think that the secular uptrend in gold may be impeded / affected post festive season as cyclicality of the asset class can come in - because Euro zone fears are still persisting?
Mr. Mehta: Correct, but if there’s any short-term solution that is found for the Euro zone and that has to be more of austerity plans rather than bail-in and bailout plans, then gold can correct. But given the cyclicality if you see it in a larger time frame - like from 2001 there have been phases of correction and consolidation around those levels, and then the uptrend continuing. So I think the correction that I saw was a healthy correction, because if you see the month of August 2011- before that it was somewhat like a parabolic rise that I had seen as prices increased 15% - 16% in just one month.
For any asset class I think such kind of increases may not be sustained. And throughout this bull run it has always been a steady run and phases of correction and consolidation - that’s largely the pattern unfolding. So the correction that has come doesn’t surprise us at all. Even despite the correction gold is still up 20-odd percent year-to-date. So I don’t think it looks anyway denting the long run uptrend. These corrections, consolidations have been part of it and will be there. But it would be very difficult to say beyond festive season, how gold (movement) will pan out, because it would largely depend upon various factors; because uncertainty in the global world is so high, that positive surprise or a negative event can change the entire scenario - so it will all depend on that, rather going by the cyclicality.
PersonalFN : Diwali is just around the corner; so are people investing gold ETFs / gold savings funds, or are they sill preferring to invest physically into gold? Do you see any change in investor’s buying behaviour while preferring to invest in this asset class?
Mr. Mehta: I think the way people approach paper gold ETFs / gold savings funds is changing, and will change, the fact gold consumption in tonnage terms is more or less constant - we have been consuming around 700 - 800 tonnes in the year. So in that terms, the gold ETFs share has been increasing - like currently the size of the industry is approximately around 30- 32 tonnes, one year back it was close to around 17 -18 tonnes of gold in the industry; so that clearly shows that the pie of the gold ETFs in the industry is increasing, though at a slow pace because of lack of awareness amongst people. As people are getting aware of gold ETFs as a product, and knowing that it is as good as gold investment - but better features like no purity concerns, no storage issues, tax efficiency - and first and foremost the price efficiency of gold ETFs rather than physical gold. So when people are becoming aware of these features, they prefer to invest in gold ETFs rather than going for physical gold. So I think that as awareness increases more, people will choose this form. Gold ETFs had a constraint of demat account, but now with gold savings funds people can also invest without a demat account - so that facilities further the growth of gold ETFs; because gold savings fund further invests in Gold ETFs . So I think as the awareness increases we are sure that people will prefer investing in these forms, rather than investing in physical form; because if you see the total consumption of the 800 tonnes, a 150 - 200 tonne comes in the form of coins and bars. Jewellery demand if for usage purpose is not replaceable by gold ETFs - there’s no way. So we surely think that this 150 - 200 tonnes, at least half of it can come to gold ETFs form as an investment - because coins and bar, people don’t wear coins and bars - it’s purely for investment purposes. So going forward I think as investors mature and people know more and more about gold ETFs, the consumption for gold ETFs will increase.
PersonalFN : So for investors is gold ETFs a superior than gold savings fund. If one has a demat account should one go gold ETFs or gold savings fund?
Mr. Mehta: I think one should go for gold ETFs as gold ETFs have a higher probability of tracking gold prices more efficiently, However, it would be convenience that would largely decide the mode of investment. One without a demat account or one who wants to opt for a automated SIP investment would prefer Gold Savings Fund over the Gold ETF. We would suggest that people with a demat account should prefer Gold ETFs for investments in gold.
PersonalFN : You know silver has also attracted a lot of attention; gold versus silver - what’s your view?
Mr. Mehta: See silver first thing is as an investment also brings volatility along with it, plus if you are looking at gold or silver as a diversification tool - as portfolio diversifier, silver largely doesn’t fulfill that role. Silver post the usage as a monetary asset, is more of an industrial commodity. Around 65% to 70% of the usage for silver comes from industrial purposes; so given that say industrial activity will do well when economic activity will do well, and already have an exposure to economic activity through your exposure to equities. So if you are trying to diversify your portfolio from investments in equity in economic activity, then silver doesn’t fulfill that role - because returns are close running to economic activity.
PersonalFN : But still people do look at it as a precious metal…
Mr. Mehta: Yes, because if you see - classic example was 2008, when in the downturn when equities had fallen badly, gold was steady or on a higher side - silver was somewhere between that. So it has properties of both, you can classify or in some way you can call it "half gold, half copper"; so it may appreciate along with the gold prices, but again if there’s downturn it will also be attracted by its linkage to the industry activity. So, from that point of view you could call it "poor man’s gold", because people think that - "I can buy 10 grams of gold at Rs 27,000 - Rs 28,000; I can buy 1 kg of silver Rs 50,000 - Rs 55,000; so people think that I can get more - bigger leverage in silver. But that may actually mean the usage - or the reason why you are invested in that, it sometimes fails to serve that purpose. So coming from that point of view we always advise or suggest that people should look at gold for portfolio diversification.
PersonalFN : So finally our last question. With Diwali being just around the corner, what would be your advice to investors’ who fancy investing in gold?
Mr. Mehta: People who fancy investing gold, we’ll always caution them not to go overboard. Look at your portfolio, look at your overall allocations - be somewhere between 10% - 20% allocation to gold - not more than that. Having said that we also say that it is must have in your portfolio, because the properties that gold have are very different from the other assets that are available, and usually helps during one’s uncertain times in term of providing you an effective portfolio diversification. So have an allocation but don’t go overboard.
PersonalFN : Mr. Mehta, many thanks for your valuable time and insights. We are sure our readers will benefit from your views.
Mr. Mehta manages Quantum Gold ETF and Quantum Gold Savings Fund at Quantum Mutual Fund