In India a person buys gold mainly in the form of jewellery, gold bars or even coins. This attraction towards gold has been since time immemorial. It brings in a sense of pride and happiness to buy gold in the physical form. If one’s daughter is to get married, the first thing that comes to her parent’s mind is buying gold jewellery. Some people also consider it as a status symbol. But this emotional way of purchasing seems to be taking a back seat, as investors seem to be looking at it as an investment avenue or an asset class to protect one’s portfolio in times of economic and political uncertainties.
It is noteworthy that when the global economy pained due to ripples sent by the U.S. sub-prime mortgage crisis, the precious yellow metal escalated to new highs. Even today while we are treading on the path to recovery, the prices of gold are stiff due to debt-overhang situation in the Euro zone.
An interesting observation of the data on net inflows in Gold ETFs (GETF), for FY12 reveals that there has been 59% increase in net inflows in GETFs as compared to FY11 (where Rs 2,289 crore was garnered); which is 43 times more than the amount collected in FY09, the year in which global financial crisis shook capital markets. This thus reveals that investors have preferred to be risk averse, and preferred to invest in gold (through GETFs) for its trait of being a safe haven. Moreover the appreciation in price of gold in the last 5 years, has also led to the AUM for the category multiply more than 20 times in the past five years.
(Source: ACE MF, PersonalFN Research)
If an investor were to invest Rs 10,000 in gold ETF on April 13, 2007, it would have yielded him a sum of Rs 29,032; whereas a similar investment in the BSE Sensex five years ago would have fetched Rs 12,772.
The underperformance of other asset classes and growing risk aversion (due to an uncertain environment) has encouraged investors to invest in gold through GETFs. This change in mind set also encouraged mutual fund houses to launch gold ETF products in the last year.
We believe that unless the global economic environment doesn’t get upbeat, net inflows in GETFs and allied products (such as gold fund of funds) is expected to remain robust. The precious yellow metal would shield your portfolio during these volatile times, and therefore one must continue to have gold in the portfolio. Ideally you should have 5% to 10% allocation towards gold (preferably through gold ETFs) and have an investment time horizon of 10 to 20 years.