GOLD

1. GOLD as an asset class www.fpgindia.org

2. Gold and India • In 2009, total Indian gold demand touched USD 19bn = 15% of global market • Over last decade, value of gold demand in India has increased @13% per year • Currently India and China together account for 25% of annual gold demand • Foundation asset in Indian household – jewellery and investment www.fpgindia.org

3. Gold and India • Savings rate estimated @ 30% • Around 10% in invested in gold • Traditional division between jewellery and investment overlap • During H1CY10 Indian net retail investment in gold has increased by 264% to 93 tonnes (25% of India’s gold demand) • Individual’s purchases of coins and bars www.fpgindia.org

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5. Gold imports www.fpgindia.org

6. Currently produces 0.5% of it’s annual consumption • Between 1992 and 2009: • Value of annual gold imports has risen by 1,015% • Gold imports rose from ` 88 bn to ` 881 bn www.fpgindia.org

7. Reasons for investing • Diversification • Hedge against inflation • Volatililty (over the last 5 years) • Sensex – 27% • BSE 500 – 30% • BSE Metal – 46% • Gold – 23% www.fpgindia.org

8. Reasons for investing • Better returns in shorter periods (over last 5 yrs ending Sept 30 , 2010) • Gold – 37% • Sensex – 1% • Safe haven • US Dollar hedge www.fpgindia.org

9. In risk management and portfolio theory • it is not only individual volatilities that matter • it is also how assets interact with each other, i.e., their correlation structure • Gold tends to have little correlation with many asset classes • strong viable choice for portfolio diversification • Some are peculiar to the gold market, underpinning its lack of correlation to other assets. These include: • fashion trends, • marketing campaigns, • the Indian wedding season, • religious festivals, • gold mine exploration spending, • new discoveries of gold, • the cost of finding and mining gold, and • central banks’ strategic reserve decisions. www.fpgindia.org

10. Gold avenues • Physical gold • Gold ETF • Gold mutual funds (FoFs) • E-Gold through NSEL • India Post gold retail program • Gold-linked microfinance scheme • Gold through commodities exchange www.fpgindia.org

11. Gold ETF vs E-Gold Gold ETF E-Gold physical gold held in dematerialized form which can be traded electronically at NSEL a digital gold currency that allows you to trade redeem physical gold from your demat account retail investors can soon exchange their e-Gold units issued by NSEL with selected jewellery outlets, in the form of jewellery • an exchange traded mutual fund scheme • it does not necessarily hold physical gold stock at its fullest • cannot be redeemed for physical gold • No exchange possible www.fpgindia.org

12. Gold ETF vs E-Gold Gold ETF E-Gold E-Gold is tradable for longer hours (1000 hrsto 2330 hrs) spot rates of gold no custody charges Gold, silver, zinc and copper • Tradable only during market hours • intends to mirror gold prices. • Charges - around 1%-1.5% per annum • Only Gold ETFs at present www.fpgindia.org

13. Source: CRISIL Figures as on Dec. 31, 2010 www.fpgindia.org

14. Price of gold over the years (in `) www.fpgindia.org

15. Source: RBI www.fpgindia.org

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17. Indian context Interesting facts www.fpgindia.org

18. Returns over the last 36 years • 5% plus in the last 24 years • 7% in the last 20 years • 16% plus in the last 11 years • 33 years of positive returns y-o-y www.fpgindia.org

19. Returns over the last 36 years • 3 years of negative return • 1992 • India Economic Crisis • Sensex went down from a high of 4546 to close the year at 2615 • Gold gave a return of -2% • 1997-98 • Asian Financial Crisis • Sensex went down in the same period after touching a high of 4605 to close 1998 at 3055 levels • Gold gave a negative return of -14% in 1997 and -1.8% in 1998 www.fpgindia.org

20. Largest producer of gold –China (almost a tenth of world’s supply) • By 2014, China will overtake India as the largest user of gold www.fpgindia.org

21. The gold supply is limited: • all the gold ever mined would fit into a storage room about 55 feet long, 55 feet tall and 55 feet wide www.fpgindia.org

22. For 2011 Views on gold www.fpgindia.org

23. 10 years of consecutive rise • 25% rise in 2010 • Expect trend to continue in 2011 www.fpgindia.org

24. Combination of factors which encourages a high price for gold: • safe haven in the face of a very delicate global economic situation • uncertainty generated in the European financial system • weakness of the dollar • growth in inflation in Asian countries and emerging markets • excess of liquidity in the USA www.fpgindia.org

25. Jim Rogers, the commodities investment guru: • gold will continue to rise over the next decade, although it may fall off before it reaches historical values adjusted for inflation • Swiss private bank, Sarasin: • the price of gold over recent months has been mainly driven by investment demand. This is principally reflected by the growing quantities of gold held in exchange-traded funds (ETF) www.fpgindia.org

26. German newspaper Handelsblat: • central banks have moved from being sellers to buyers of this metal and this is an unequivocal signal about the safest place for investors www.fpgindia.org

27. Gold ETF www.fpgindia.org

28. Gold ETF Pros Cons Need to be computer savvy No possibility of doing a SIP Liquidity could be an issue in case of emergencies • Investments can be made in small amounts • Safety and security • Easy to transact • Cheaper than investing in physical gold • Transparency of prices • Lower cost of holding www.fpgindia.org

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30. Physical gold www.fpgindia.org

31. Physical gold Pros Cons Cannot be sold back to a bank Security Guarantee of quality High cost at time of purchase and sale High cost of storage • Can be purchased from any bank or jeweller • ‘Feel’ the product • Can be sold back to jeweller • Can be purchased in cash • Used for ‘storage’ of unaccounted money www.fpgindia.org

32. Gold fund of funds www.fpgindia.org

33. Gold FoFs Pros Cons Higher costs than ETFs Minimum annual cost of 1.5% p.a. Gold mining fund FoFs track the prices of the mining companies and not the price of gold Exit load of 2% in year 1 • SIP/STP/SWP is possible • Good for small investors - start with amounts of as low as ` 100 or `500 • No demat account is required www.fpgindia.org

34. E-Gold www.fpgindia.org

35. E-gold Pros Cons Capital Gains – 3 yrs Still very new in India. Downsides are still not known • Seamless entry and exit • Safety and security • Zero holding cost • Convertibility into physical gold (takes 3-4 days) • Working on conversion of e-gold in demat directly into jewellery items www.fpgindia.org

36. taxation www.fpgindia.org

37. Varies according to investment route • Treated as a ‘capital asset’ • Liable for capital gains tax • Tax treatment similar to a debt fund www.fpgindia.org

38. Source: Outlook Money www.fpgindia.org

39. Source: Outlook Money www.fpgindia.org

40. gold in financial planning www.fpgindia.org

41. Important part of asset allocation • just after the 9/11 terror attacks in the US, while both stock markets and bond markets crashed across the world, gold held steady and, in fact, rose on that day by 6% • during the financial crisis in 2008, gold prices increased by 28% while the S&P CNX Nifty (Nifty) declined by 51% during the year www.fpgindia.org

42. Idea is to use it as a ‘defensive’ asset class • Good for managing risk in a portfolio • Gold market is highly liquid and many gold bullion investments have neither credit nor counterparty risk • Should ideally be in the region of 5%. 10% tops www.fpgindia.org

43. Strong case for gold to be allocated as an asset class on its own merits • part commodity • part luxury consumption good • part financial asset • its price does not always behave like other asset classes and especially not other commodities www.fpgindia.org

44. David Ranson of Wainwright Economics (in Oregon) (Source: The Economist – Aug 4, 2010) Study www.fpgindia.org

45. Gold along with corporate bond spreads, as the key • Gold is the best indicator of future inflation • Corporate bond spreads are a predictor of economic growth • when spreads are falling, the economy is improving, and when spreads are widening, the economy is deteriorating www.fpgindia.org

46. Gold down, spreads down • This indicates a period of disinflationary growth, so buy equities.  • Gold down, spreads up • This indicates a weakening economy with disinflation, so buy government bonds. • Gold up, spreadsdown • This indicates inflationary growth, so buy commodities (an equally-weighted basket of the five components in the Goldman Sachs Commodities Index: energy, industrial metals, precious metals, agriculture and livestock) • Gold up, spreads up • Growth is decelerating and inflation is accelerating, so buy gold. www.fpgindia.org

47. Thank you for your time www.fpgindia.org