Gold, Gold ETF and gold FoF - a perspective!


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Gold, Gold ETF and gold FoF - a perspective!

  1. 1. 1Gold, Gold ETF and Gold FoF December 07, 2012 Gold, Gold ETF and Gold FoF – a perspective:Preferred Picks – Gold ETFs and Gold FoF:Note: Preferred picks arrived based on traded volumes, tracking error and Corpus. Trailing Returns (%) up to 1 year are absolute and over 1 year are CAGR.Key takeaways: The current uncertainty in global macro economic conditions is likely to keep the gold prices at higher levels going forward, especially in the short term. A slight depreciation in the rupee value will further help to push gold prices up in the domestic front. The fundamental drivers for higher gold prices still remain in place, Investors can consider investing in the above mentioned preferred picks. Investing through staggered investment modes such as SIP and DIY SIP are also preferable. The collective holding by global ETFs in physical gold was at a record high of 2621 tonnes (end Nov 2012), while the holding by Indian ETFs was around 37 tonnes (end Oct 2012). The corpus of Gold FoF grew 20 times (thanks to the SIP facility in Gold FoF) in a span of 18 months to Rs. 4,343 crore in September 2012 from Rs. 212 crore in March 2011. The corpus of Gold ETF grew 16 times in a span of 4 years to Rs. 11,477 crore in October 2012 from Rs. 660 crore in October 2008.Gold, Gold ETF and Gold FoF Retail Research
  2. 2. 2I. SIP in Gold:Comparison of SIP and Lump sum investments in Gold & Nifty: The above table portrays the relative performance of Gold and Nifty investments in different investment modes. It is worth noting that the investments in gold in both options whether SIP or lumpsum, managed to yield notable returns compared to the returns from Nifty investments from both modes. The longer the holding period, the better and smoother the returns. Lumpsum returns are better if large sums are invested at periods of market bottoms. SIP returns are better if it is started at or just after the market tops. Further, SIP route helps out to average out the cost of the investment. To conclude, it is advisable to allocate at least 5-10% in gold of anyone’s total portfolio. The investor may invest either in lumpsum or through SIP/DIYSIP.Gold, Gold ETF and Gold FoF Retail Research
  3. 3. 3II. Why Gold?Rationale behind investing in Gold: Gold is valued and traded in all the countries of the world. Gold is the most liquid asset among all options. An investment portfolio with an allocation to gold improves the consistency of the portfolio making it strong and stable. Gold has provided consistent appreciation on a continuous basis over the past decade. Gold has a low correlation with major indices/most other asset classes and hence is a good portfolio diversifier. Ideally Gold should constitute 5-10% of one’s portfolio on a continuing basis. Gold is a good tactical hedge against inflation. It has outperformed the consumer price index 8 times out of 10 in the last ten years. Gold is used to hedge currency exposure. It has been a part of portfolios since ancient times to guard against economic pitfalls or disasters. Gold acts as a safe haven during economic crisis and market downturns. The price of gold is not linked to the performance of an economy, industry or company. Its appreciation is not affected by market volatility.Rationale behind investing in Gold ETF: Investors can buy and sell the units of Gold ETF directly on the stock exchange through registered brokers. Units of Gold ETF are held in the demat form just like equities. Gold ETFs give an opportunity to investor to invest in standard gold bullion (0.995 purity) without taking physical delivery of gold nor compromising with its quality. No entry/exit load. The total expense ratio charged by funds has been a maximum of 1% per annum. These will not be liable to wealth tax. A custodian is appointed by the AMC for safe keeping of the gold bought on behalf of the investors.Gold, Gold ETF and Gold FoF Retail Research
  4. 4. 4III. Gold Outlook:.Gold Outlook – Short Term: Global macro economic uncertainty is likely to keep the gold prices at higher level going forward, especially in short term. Given the possibility of devaluation of US$ with more quantitative easing measures by the US government coupled with thrashing out of new deals for Greece by EUs leaders gold prices could remain buoyant. China and India are expected to continue as biggest consumers of gold despite the recent downturn in demand for gold in China due to slowing of domestic economy. A slight depreciation in the rupee value will further help to push gold prices higher in domestic front. Furthermore, central banks are in mood of buying the precious metal rather than selling. Hence the fundamental drivers for higher gold prices still remain in place. Overall, we are of the opinion that the macroeconomic environment for gold is turning more positive and prices could reach between USD 1,800 and 1,850 per ounce in the first half of 2013.Background: Gold is a mainstay of economies worldwide. Gold has been the best performing asset over years among all investment options available in the world. It has consistently outperformed other traditional asset classes such as equity, debt, currencies and other commodities irrespective of most of market and economic cycles with a compounded annual growth rate of 18% for the last ten year period. In other words, Gold’s value increased nearly 5.5 times over between 2002 and 2012, rising from $271.04 to $1,724.4 (as of 29 November 2012). Given its special status of universally accepted medium-of-exchange, gold has been used as the standard for many currencies in history. Gold is a foundation asset within any long term savings or investment portfolio. For centuries, particularly during times of financial stress and the resulting flight to quality, investors have sought to protect their capital in assets that offer safer store of value. Gold offers refuge from widespread default risk. It offers investors insurance against extreme movements in the value of other asset classesGold, Gold ETF and Gold FoF Retail Research
  5. 5. 5IV. History Of Gold:.History Of Gold: • One of the oldest civilizations, the Sumerians of Mesopotamia, who lived in what is modern-day Iran and Iraq, first used gold as sacred, ornamental, and decorative instrument in the fifth millennium B.C. • The early Egyptians used gold primarily for personal adornment, rather than for monetary purposes, although the kings of the fourth to sixth dynasties (c. 2700 - 2270 B.C.) did issue some gold coins. • The first large-scale, private issuance of pure gold coins was under King Croesus (560-546 B.C.), the ruler of ancient Lydia, modern-day western Turkey. Stamped with his royal emblem of the facing heads of a lion and a bull, these first known coins eventually became the standard of exchange for worldwide trade and commerce. • Gold is traditionally weighed in Troy Ounces (= 31.1035 grams). It has a specific gravity of 19.3, meaning that it is 19.3 times heavier than water.Weight Equivalents:Gold, Gold ETF and Gold FoF Retail Research
  6. 6. 6V. World Gold market dynamics:. Gold Market Dynamics Supply Demand a. Mine Production. a. Jewellery. b. Net producer hedging. b. Industry. c. Recycled Gold. c. Investment – ETF, Bar & Coin. d. Net Central Bank Sales. d. Official Purchase.Gold, Gold ETF and Gold FoF Retail Research
  7. 7. 7Va. Supply:.Production & Supply: The major source of Gold supply is the mine production which contributes around 63% of the world supply and the remaining supply is met through recycled gold and minimum part of Net producer hedging. The total gold supply in 2011 stood at 4,505 tonnes, which was 3% up from the previous year supply of 4,355 tonnes. The overall supply during Q3, 2012 witnessed contraction by 2%. The total supply for the current year till Q3 of 2012 stood at 3,325 tonnes. As of 2011, approximately 171,300 tonnes of gold have been mined over the course of human history. Seven countries such as China, USA, Australia, Russia, South Africa, Peru and Indonesia produce more than a 1,000 tonnes of gold annually. The gold supply in India stood in 2011 at 1,039 tonnes, in which 969 tonnes were from imports. In 2012, till 3rd quarter, imported figure stood at 604 tonnes.World Gold Supply: Sources: World Gold Council. China is the worlds biggest gold producer, having raised production every year since 2004. In 2011, output was pegged at 355 tonnes. In 2011, Australia produced 270 tonnes of gold and ranked as the world’s second largest gold producer. The US produced 237 tonnes of gold during last year, which made it the world’s third largest gold producer. Gold production in the United States is mainly concentrated in the states of Nevada, Alaska, Utah, and Colorado.Gold, Gold ETF and Gold FoF Retail Research
  8. 8. 8Va. Supply: contd….Distribution of gold supply by category: 100% 80% 60% 40% 20% 0% 1970 1980 1990 2000 2010 Mine production Net producer hedging Recycled Net central bank sales Net disinvestm entDistribution of mine supply by countries: Data as of 2011 Chile (2%) Other Countries (23%) Brazil (2%) Papua New Guinea (3%) Mexico (3%) Uzbekhistan (3%) China (13%) Indonesia (4%) Ghana (4%) Canada (4%) Australia (10%) Peru (6%) South Africa (7%) United States (9%) Russia (7%)Gold, Gold ETF and Gold FoF Retail Research
  9. 9. 9Vb. Demand:.Demand: Major demand for Gold arises from Investment demand, Jewellery demand, Government reserves & Industry applications. In 2011, the demand for gold was strong in all the four categories and annual demand grew 11% to 4,586 tones. Investment demand for ETFs however declined to 185 tonnes in 2011 from 382 tonnes from 2010. Till Q3 of the year 2012, Gold ETFs across the world accumulated 189 tonnes. India is worlds biggest gold consumer (933 tonnes in 2011) followed by China and US. Jewellery and investment are the key areas of Indian gold demand. In fact, gold jewellery made up about 61% of total gold demand in India in 2011. Investment demand: Given the proven risk mitigation, hedging and safe haven properties, gold is a natural choice of deploying savings as investors invest in the commodity seeking protection from economic uncertainty. Gold ETFs, one of the major investment options is getting popular among investors day by day. There are other forms of investments in gold like bars, coins, derivatives, and others. As of November 16, 2012, the collective holding by global ETFs in gold was at 2,324 tonnes. According to AMFI, total assets of gold ETFs in India jumped to Rs 114.97 billion as on October 31, 2012, from Rs 90.90 billion a year ago. Jewellery demand: India is the largest gold jewellery market in the world & the demand stood in 2011 to $46,371 mn. Apart from consumption by central banks, industry applications increase the number of usages for the yellow metal.World Gold Demands (tonnes): Sources: World Gold Council.Gold, Gold ETF and Gold FoF Retail Research
  10. 10. 10Vb. Demand: contd….Distribution of gold demand by category (tonnes): 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1970 1980 1990 2000 2010 Jew ellery Technology Investm entWorld official gold holdings (tonnes): 8134 8000 6000 4000 3396 2814 2452 2435 2000 1054 1040 935 765 613 558 502 424 383 362 323 310 302 287 282 0 Saudi Arabia Turkey IMF Taiwan US Germany Italy France China Russia Netherlands India Venezuela Switzerland Japan Portugal Lebanon Spain ECB UK Sources: World Gold Council. International Financial Statistics, December 2011.As of November 30, 2012, Total World official Gold holding by Central Banks was at 31,461 tonnes.Gold, Gold ETF and Gold FoF Retail Research
  11. 11. 11Vb. Demand: contd….Gold Demand by Global ETFs over years: 800 2,000 Gold Dem and by Global ETFs (tonnes) (LHS) U$/troy oz (RHS) 1,800 1,600 600 1,400 1,200 400 1,000 800 600 200 400 200 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD 2012*Top global gold backed ETFs: As of November 30, 2012, the collective holding by global ETFs in gold was at 2,621 tonnes.Gold, Gold ETF and Gold FoF Retail Research
  12. 12. 12VI. Applications of Gold:Applications of Gold:. Jewellery: Jewellery is one of the major demand drivers for the yellow metal and the demand comes mainly from India & China who contribute more than 50% of the world jewellery demand. Technology: The increased usage of gold in technology is because of its qualities such as corrosion resistance (which means protecting the part from becoming rusty), good conductor of electricity which is used in microchips & electronic appliances for connecting. Gold is widely used as connectors & wires in various electronic items as its reliability is high. Medicine: Gold’s medicinal importance has been researched many centuries ago & Chinese and Indian people use gold for medicinal purposes. Chinese many years ago started using Gold as an important part of the medicines they prepare for small pox, because of the resistance power & the power to protect against bacteria and to protect from skin allergies. In the US, gold had been known for improving heart and improved blood circulation. Gold has also been used to cure cancers. Nanotechnology: Gold nowadays is used as catalyst and the gold nano particles have been efficient absorbers of mercury from the water and act as purifiers. Gold has infrared shielding capacity and it has prompted many builders to use it in the exteriors windows, which reduce the heat getting inside the building. Adding a gold nano rod to the memory sticks or optical drives can significantly increase the storage capacity, according to research. Space & engineering: Gold has many important qualities such as good reflector of heat & infrared radiation. Gold coating is applied on various items used in space to protect against various radiations that occur. Gold’s resistance to extreme temperatures and corrosion resistance are attracting more engineering uses and the demand is increasing. A gold coating on windows provides protection against extreme temperatures. Dental Industry: Gold in recent years has been used extensively in dental applications, due to its resistance to corrosion and is not harmful when it comes into contact with body. Setting up of golden tooth is one of the major uses in the dental industry & seen as a status symbol.Gold, Gold ETF and Gold FoF Retail Research
  13. 13. 13VII. Gold prices:Factors influencing gold prices: High Inflation: During high inflation, investors tend to invest in gold as it is seen as a good hedge against inflation. Rising inflation appreciates gold prices as people start investing in the yellow metal.. Interest rates: The demand for gold increases when the interest rates trend down. Lowering interest rates increases gold prices as gold becomes a better investment option vis-a-vis debt products that earn lower interest. Vice versa, people tend to keep money in deposit compared to gold when interest rates rise. Weakness in other asset classes and lack of safe havens: When the economy and financial markets do not do well, gold investments can provide a good hedge for investment portfolio. Gold is negatively co-related to most of asset classes. Decline of Mine production and Supply: Gold mining and production have been decreasing in the recent periods while there is an increase in the demand for gold. An increase in the cost of mining, strikes by gold miners, legal formalities, geographical problems and worsening political situation have led to a fall in gold mining. Demand and supply factors: A change in supply could alter the price of gold. If there is a sharp increase in production, its price is likely to fall. Likewise, the fluctuations in price tend to occur due to changes in demand. Central bank demand: When dollar value depreciates, central banks of most of the developed countries start to increase their share of gold in forex reserves. Changes in exchange rates: Weaker USD usually leads to an increase in world gold prices. It is because investors choose to sell their dollar and buy gold with the hope that gold can protect the value of their dollar assets. Geo political and economical concerns: Whenever there is uncertainty prevailing in the globe, the prices of gold shoot up. In the recent financial crisis the gold prices were in uptrend. Economic data: The macro economic data such as unemployment data, GDP numbers & Home sales also impact gold prices. When the economy is growing, investors will move the funds from safe assets to the riskier assets, which give higher returns. Other factors such as speculation, demand for jewellery, changing government policies, government borrowing, sentiment, liquidity, safe Haven Buying, manipulation, Rising population affect the price for gold.Gold, Gold ETF and Gold FoF Retail Research
  14. 14. 14VII. Gold prices: contd…Interactive gold price chart (Spot Gold in INR & USD):. Last 6 Months Chart: Last 1 Year Chart: Last 3 Years Chart: Last 10 Years Chart: Sources: World Gold Council.Gold, Gold ETF and Gold FoF Retail Research
  15. 15. 15VIII. Gold Investment Options: Jewellery: Investing in jewellery may not be considered as investment as jewellery is generally not made from. 24 carat gold; it is generally made from 22 carat or 18 carat gold since 24-carat gold is brittle and cannot be set to beautiful designs of jewellery. Investors have to pay for the making charges and wastages. When liquidated, the making charges, impurities and wastage will be cut and investors may end up getting less than what had invested. Gold bars or coins: Government-certified gold coins or bars have purity level of close to 99.9 and they can be sold easily. Banks charge extra for their coins of anywhere between 5% and 10%. Also the bank coins have lesser liquidity as they are not bought back by the banks. Bullion bars are good modes for investment but the minimum investment is much higher. Gold certificates. is a certificate which represents ownership of gold bullion held by a financial institution for convenient and safe storage. There is a fee for storage and insurance. E gold: National Spot Exchange Limited (NSEL), India is offering E-series to invest in gold. Retail investor can trade in commodities especially precious metal like gold in e-form. Like equities one can keep their gold in demat form, which not only saves on insurance cost and locker rent but also one can invest in small denominations. Gold Exchange Traded Funds: They are mutual fund schemes, listed on the stock exchanges and traded like shares. The pooled amount is invested in the physical gold. When redeeming the units, investor can go to the fund house or sell in the market and get them converted in to cash. Gold ETFs are proving to be an easier and safer mode to buy gold. The charges are very less and the gold can be accessed electronically. Mutual funds further offer gold fund of funds in which investors can invest as much small amount as Rs. 100 every month and where they don’t need to have a demat account. Gold Mutual Funds: Gold mutual funds hold portfolios of gold mining companies and are directly linked to gold prices. They are actively managed as they are handled by the fund managers. Apart from above, various schemes announced by institutions to promote savings in gold. Recently, Reliance Money Precious Metals launched a gold accumulation plan (minimum Rs. 1,000 per month) to garner Indias unorganized gold market.Gold, Gold ETF and Gold FoF Retail Research
  16. 16. 16IX. Gold market in India: India is worlds biggest gold consumer followed by China and US. Indian Households hold more than 20,000 tonnes. of gold, worth $1.16 trillion according to WGC, that is the largest amount of bullion holdings in the world. Jewellery and investment are the key areas of Indian gold demand. India’s total gold demand was at 933 tonnes in 2011 whereas the Jewellery demand was 567.4 tonnes. Gold jewellery made up about 61% of total gold demand in India in 2011. In the first half of 2012, gold demand in India was affected by elevated prices, economic slowdown, doubling of import duty and the consequent strike by jewellers for around a month. However, demand rebounded in the September quarter as people got adjusted to the high prices. Moreover, a late revival of monsoon and restocking by traders and jewellers ahead of the festive and wedding season were key reasons for the upward trend in demand. The government effectively doubled the import duty on gold to 2% in January and followed it up by raising it to 4% during the budget announcement in March to trim overseas purchases of the idle asset and raising it in short intervals to reduce the current account deficit (CAD). Hence, Indias gold imports is likely to drop to 550 tons next year. Interestingly The mix between the jewellery and investment gold is also changing, with more growth towards investment gold.India gold demand in tonnes: India gold supply as on 2011 (tonnes): 1200 1000 Net Imports (93%) 800 Recycled Gold 600 (5%) 400 200 Other sources (1%) 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Gold, Gold ETF and Gold FoF Retail Research
  17. 17. 17X. Gold ETFs:Gold ETF:. Gold ETFs are passively managed mutual fund schemes investing in standard gold bullion having 99.5% purity. They are listed on the stock exchanges for trading with an intention to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold. These are designed to provide returns that closely correspond to the returns provided by domestic price of Gold.Gold ETFs History: Globally, In May 2003 the first Gold Bullion Security was launched in Australia. In Nov 2004 the World’s 1st Gold ETF –Street Tracks Gold Trust was launched. Benchmark Mutual Fund was the first AMC to launch a Gold ETF in India - “Gold BeEs” in February 2007. As of today, 12 fund houses have launched Gold ETFs. The AUM of the category witnessed increasing substantially from Rs.96 Crores in March 2007 to Rs.11,497 Crores in October 2012, representing 2% of the mutual fund industry AUM.Advantages of Gold ETFs : ETFs have more advantages compared to actively managed funds. They are as follows; Small denomination: Retail investors, who want exposure to gold in small amounts, can opt for Gold ETFs. It allows investors to buy one unit, which is buying 0.5 - 1 gram of gold depending on the scheme. Liquidity: Gold ETFs are can be bought and sold any time during the trading hours like equities at the price quoted on the exchange. This makes it a liquid investment instrument. Transparent Pricing: The price of ETFs is quoted on the stock exchange and there is a bid/ask during market hours enabling you to buy/sell at market prices. Thus you do not have to pay a premium while you purchase or a sell at a discount as in the case of jewellery or even sometimes in coins and bars. Safety: Gold ETFs is essentially buying gold in paper form. So the investor does not have to take the trouble of safe keeping of the gold. The custodian appointed by the AMC has the responsibility of taking care of the gold.Gold, Gold ETF and Gold FoF Retail Research
  18. 18. 18X. Gold ETFs: contd… Purity: Mutual funds are governed by SEBI and SEBI regulations require the purity of underlying gold in Gold ETFs. to be 99.5% fineness and above. This spares investors the trouble of finding a reliable source to buy gold. Tax Efficient: Gold ETFs do not attract wealth tax. Besides, the investment is categorized as long term if it held for more than a year unlike physical gold where the period is 3 years.Disadvantages of Gold ETFs: Demat account: Demat account and broker’s accounts are mandatory for an investor to participate in the gold ETF trading as they are traded in stock exchanges. However, no demat and broker accounts are necessary in case of gold fund transactions. Brokerage Charges: The brokerage charges need to be paid when trading in ETFs. It can be minimized by trading less but the very charm of ETFs is lost because it is meant for being traded more often than an index fund. SIP in ETF is not applicable in ETFs. But gold funds provide the facility to invest through SIP with minimum amount of Rs. 100. True Replication: The ETFs may not replicate the returns of underlying index due to management expenses, cash holding and so on which result in higher tracking error.Gold ETFs Market in India: Over the past few years, there has been a significant development in Indian gold ETF market though the size of the industry is still small as Indian investors seek greater access to more liquid gold investments. Hence ETFs have gained more popularity among them. The Indian Gold ETF industry offers 14 gold ETFs and 11 gold FoFs. The total AUM of Gold ETF as of October 31, 2012 was at Rs. 11,477 crore while the AUM of Gold FoF was at Rs. 4,669 crore. As of October, 2012, the collective holding by Indian ETFs in gold was at 37 tonnes (approx). Total traded volume in Gold ETFs also witnessed a rise on the NSE, a daily average of Rs. 28.88 crore over last three months which shows the healthy growth of the Indian Gold ETFs industry. As far as net flows are concerned, Gold ETFs saw net inflows for most of the months in last 3 years reflecting the investors’ increased interest. Further, Gold ETFs witnessed a surge in the number of folios every month where its total folios as of October 2012 stood at 5.04 lakh.Gold, Gold ETF and Gold FoF Retail Research
  19. 19. 19X. Gold ETFs: contd….Trend in the AUM (Rs Crs) of gold ETFs in India: 12000 10000 8000 6000 4000 2000 0 Jun-09 Oct-09 Dec-09 Feb-10 Jun-10 Oct-10 Dec-10 Feb-11 Jun-11 Oct-11 Dec-11 Feb-12 Jun-12 Oct-12 Aug-09 Apr-10 Aug-10 Apr-11 Aug-11 Apr-12 Aug-12Trend in the AUM (Rs Crs) of gold FoF in India: 5000 4000 3000 2000 1000 0 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12Gold, Gold ETF and Gold FoF Retail Research
  20. 20. 20X. Gold ETFs: contd….Asset growth (Rs Crs) of gold ETFs over periods: 3500 GS Gold BeES Kotak GOLD ETF Reliance R* Shares Gold ETF SBI Gold ETF UTI-Gold ETF 3000 2500 2000 1500 1000 500 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12Asset growth (Rs Crs) of gold FoFs over periods: 2500 Reliance Gold Savings Fund Kotak Gold Fund 2000 SBI Gold Fund ICICI Pru Reg Gold Savings Fund HDFC Gold Fund 1500 1000 500 0 Jun-11 Sep-11 Dec-11 Jun-12 Sep-12 Mar-11 Mar-12Gold, Gold ETF and Gold FoF Retail Research
  21. 21. 21X. Gold ETFs: contd….Physical Holding by Indian ETFs (tonnes) Vs. Gold India spot price (10g): 40 35000 Physical Holding by Indian ETFs (tonnes) (LHS) Spot Gold Price (INR) (10g) (RHS) 35 30000 30 25 25000 20 15 20000 10 15000 5 0 10000 Jun-08 Oct-08 Dec-08 Feb-09 Jun-09 Oct-09 Dec-09 Feb-10 Jun-10 Oct-10 Dec-10 Feb-11 Jun-11 Oct-11 Dec-11 Feb-12 Jun-12 Oct-12 Apr-08 Aug-08 Apr-09 Aug-09 Apr-10 Aug-10 Apr-11 Aug-11 Apr-12 Aug-12Correlation between net inflow in gold ETFs Vs. India Gold Spot Price & Sensex: 1200 Inflow s into Gold ETFs Gold India spot price Sensex 33000 1000 28000 800 600 23000 400 200 18000 0 13000 -200 -400 8000 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Jul-11 Oct-11 Jan-12 Jul-12 Oct-12 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12Gold, Gold ETF and Gold FoF Retail Research
  22. 22. 22X. Gold ETFs: contd….Net turnover (Rs Lakhs) in gold ETFs on NSE over periods: 45000 Net Turnover on NSE (Rs in Laks) 30000 15000 0 Nov-07 Jan-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Sep-09 Nov-09 Jan-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Nov-11 Jan-12 Sep-12 Nov-12 May-09 Jul-09 Mar-10 May-10 Jul-10 Mar-12 May-12 Jul-12Daily Average of traded volume (Rs Lakhs) of Gold ETFs over last three months: Birla Sun Life Gold ETF ICICI Prudential Gold ETF IDBI Gold ETF Axis Gold ETF Quantum Gold Fund ETF Canara Robeco Gold ETF Religare Gold ETF MOSt Shares Gold ETF HDFC Gold ETF UTI - Gold ETF Reliance Gold ETF SBI Gold ETS Kotak Gold ETF Goldman Sachs Gold ETS 0 200 400 600 800 1000 1200 1400 1600 1800Gold, Gold ETF and Gold FoF Retail Research
  23. 23. 23XI. Gold Funds Of Fund:Gold FoF:. Gold Fund of Funds (FoF) are mutual fund schemes (not an ETF) investing primarily in units of gold ETFs. They seek to provide returns that closely correspond to returns provided by the Gold ETF. They are passively managed funds which enable an investor to save in the form of gold in a convenient manner either through lump sum investment or through systematic investment. The face value of the gold funds is at Rs. 10.Features of Gold Fund (FoF): Demat account not mandatory: Investors can invest in gold funds through the regular process of subscription i.e. in physical mode. The subscription through demat mode is an option for the investor but not a mandatory to invest in gold fund. Demat is compulsory in case of gold ETF investment. Cost Effective: Investing in physical mode enables you to invest at a lower cost as the investor does not have to incur the charges for the demat account and brokerage. Liquidity: Investor can subscribe or redeem the units on all business days directly with the Fund. The face value of the gold funds is at Rs. 10. Exit load is charged between 1% to 2% by all gold funds. Apart from the expenses of Gold Funds, they also bear the expenses of the underlying schemes in which the scheme makes investment.Comparison among gold ETF, Gold fund, Jeweller and Bank:Gold, Gold ETF and Gold FoF Retail Research
  24. 24. 24XII. Performance of Gold ETFs and Gold FoF:Performance of Gold ETFs and Gold Funds:. Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on Dec 04, 2012.Gold, Gold ETF and Gold FoF Retail Research
  25. 25. 25XIII. Gold ETFs Mechanism:. How gold ETFs work? Primary market Secondary market Seller Cash ETF Units Authorized Buy / sell Participants / Stock Exchange Market making / FI ArbitrageCreation Redemption Cash in-kind in-kind ETF Units Fund BuyerGold, Gold ETF and Gold FoF Retail Research
  26. 26. 26XIII. Gold ETFs Mechanism: contd…. Authorized participants: The fund house appoints market makers in the stock market to execute all the transactions on behalf of the fund house. The market-makers, also called as arbitrageurs or Authorized Participants (APs) act as intermediaries between retail investors and the gold ETF sponsor through the exchange. Authorized participants get creation units from the gold ETF sponsor in exchange of physical gold. Creation unit usually comprises of 1000 grams of physical gold. Authorized participants then take care of creating the market by supplying gold ETF units as per the demand. A gold ETF unit usually represents either 1 gram of gold or half gram of gold so that small investors can buy. Custodians: The gold ETF sponsor arranges for safe custody of the physical gold. Usually, specialists called custodians do this job for sponsors for a fee. The gold ETF sponsor is responsible for quality of gold, safety of gold. The gold ETF sponsor takes adequate insurance for physical gold. The gold ETF sponsor can also invest in money market instruments upto the percentage mentioned in the offer document. Bank of Nova Scotia, Scotia Macotta and Deutsche Bank AG are some of custodians of the Indian Gold ETFs. Who will guarantee the purity bought? The authorised custodian (safe keeper) sources gold from LBMA (London Bullion Market Association) approved refiners on behalf of investors. The amount of physical gold held by the custodians in all schemes is of fitness (purity) of 99 part per 1000. (i.e, 99.5% pure). The gold held with the custodian is fully insured. Arbitrage opportunity: Since the price of gold ETFs is driven by market forces (demand and supply), usually they trade at a premium or discount to their NAVs (net asset values). The role of the fund houses is to keep the market price of the gold ETF close to its NAV with the help of Authorized Participants. The Authorized Participants take advantage of any significant premium or discount between the gold ETF market price and its NAV by doing arbitrage between the gold ETF and its underlying index. How does it work? If an ETF is trading at a discount to its NAV, then the Authorized Participants will buy gold ETF units and then sell the same to the AMC (in creation units); after taking delivery of the underlying stocks, the Authorized Participants will sell the same in the markets, thereby benefiting from the arbitrage opportunity. The converse will be done when an ETF is trading at a premium to its NAV. The arbitrage mechanism ensures that there is no significant premium or discount to the NAV. At the same time, additional demand/supply is absorbed due to the action of the Authorized Participants.Gold, Gold ETF and Gold FoF Retail Research
  27. 27. 27XIV. Tracking Error and Tax implications:.Tracking Error: Investors in an ETF are buying or selling a security representing shares in the underlying index fund. They do expect the price of the ETF to closely track the value of the underlying Index. They also want a sense of how closely the ETF returns correlate with those of the index. Tracking error helps out the investors to measure how closely the ETF tracks the underling index. Tracking error is a statistical term commonly used to describe the volatility of returns of a ETF relative to the returns of its benchmark index. It is typically expressed in terms of the standard deviation of the differences between ETF and index returns over a specific horizon. It can be interpreted as the range around the index return in which ETF returns are expected to fall. For example, a tracking error of 1% implies that if the index return is 10%, the ETF return should be 9%-11% about 68% of the time. Tracking Error tells how much an ETFs returns deviate from the benchmark indexs returns over any given period of time. An ETF fund manager needs to calculate his tracking error on a daily basis especially if it is open-ended fund. Lower the tracking error, closer are the returns of the fund to that of the target Index. For investors’ point of view, the lower the tracking error, the better is the ETF. Bid ask Spread: An ideal gold ETF has a low bid/ask spread. ‘Bid’ means the investor should know the price at which he can buy units and ‘ask’ means he should know the price at which he can sell units. The difference between bid and ask should be very little, in an ETF.Tax implications on Gold ETFs:Gold, Gold ETF and Gold FoF Retail Research
  28. 28. 28XV. Gold Facts:.Global Facts: Total above ground stocks of gold, end 2011 (total: 171,300 tonnes): Jew ellery 84,300t (50%) Official Sector 29,500t (17%) Investm ent 33,000t (19%) Technology 20,800t (12%) Unaccounted 3,600t (2%) Total global gold demand, average of 5 Yrs (tonnes): Total global gold supply, average of 5 Yrs (tonnes): Dem and Flow s, 5 Yr average (Q107 to Q411) Supply Flow s, 5 Yr average (Q107 to Q411) Mine Production 2,377t (61.4%) Investm ent 1,296t (33%) Technology 455t (12%) Net Official Sector sales 47t (1.5%) Jew ellery 2,104t (55%) Recycled Gold 1,449t (37%) Sources: World Gold Council.Gold, Gold ETF and Gold FoF Retail Research
  29. 29. 29XV. Gold Facts: contd….Global majors:Major Exporters: Top Producers: Canada (4.4%) So uth A frica (7%) China (13%) US (17%)Indinesia (6.1%) US (17%) China (13%) Australia (13%) Russia (7%) Australia (10%) Peru (7.4%) United States (9%) Indinesia (6.1%) Russia (7%) Canada (4.4%) South Africa (7%) P eru (7.4%) A ustralia (10%) United States A ustralia (13%) (9%) Data as of Dec 2010 Data as of Dec 2011Major Importers: Top Consumers: Turkey (4.5%) Germany (5%) M iddle East India (25%) Germany (7%) India (25%) (9%) India (25%) India (25%) China (15%) China (18%) Middle East (10%) US (9%) M iddle East (10%) Germany (7%) Middle East (9%) Turkey (4.5%) Germany (5%) US (9%) China (15%) China (18%) Data as of Dec 2010 Data as of Dec 2010Gold, Gold ETF and Gold FoF Retail Research
  30. 30. 30XV. Gold Facts: contd…Gold has been an inflation hedge:. 40% CPI Inflation (YoY) Perform ance of Gold 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Gold has been safe haven during crisis: 60% Nifty MSCI w orld Gold Returns 30% 0% -30% -60% Dotcom Bubble (Jan00-May02) Unexpected Election (Apr04- Heavy selling by FIIs & DIIs Credit Crisis I (Dec07-May09) Credit Crisis II (Nov10-Mar12) Jun04) (Mar 06 to Jun 06)Gold, Gold ETF and Gold FoF Retail Research
  31. 31. 31XVI. FAQ:. Discount (+) / Premium (-) of Spot Price of Gold ETFs to their NAV over the last six months:FAQ on Gold ETFs: a. Why NAVs of Gold ETF schemes from different sponsors are different? Why do Gold ETFs quote at a discount to spot gold price? The NAVs of Gold Exchange Traded Funds from different sponsors vary from each other as they have been launched in different time periods. The issue price for per unit is fixed during NFO period based on the spot price of one gram of gold prevailing on the date of allotment (this date generally falls in fifteen to 30 days after the NFO is over). NAVs of such funds appreciate or depreciate by tracking closely the underlying benchmark of price of physical gold in the conventional market place. As the investment style is passive in nature, the returns are more or less similar to that of physical gold. Importantly, the ETFs do invest a very small part of their corpus in short term debt instruments such as call money and keep it as cash equivalent to maintain liquidity. Contd….Gold, Gold ETF and Gold FoF Retail Research
  32. 32. 32XVI. FAQ: contd…. Further, all AMCs charge expenses to the schemes. Such expenses are ranging from 0.96% to 1.29% per annum. As Gold ETFs are not allowed to earn money by pledging/loaning the Gold, they are unable to recover the expenses from any source. Hence as years pass by the NAVs of ETF will dip by the expenses charged to the scheme and get further away from the spot price of gold. So an older ETF will display a higher discount to the spot price. However for a new investor it does not make a difference as to whether he invests in scheme A at a higher NAV of scheme B at a lower NAV. He will typically participate in the upside/downside in line with the price of gold in equal proportions. b. Why do Gold ETFs quote in the market at a discount to their NAVs? Gold ETFs are can be bought and sold any time during the trading hours like equities at the price quoted on the exchange (NSE and BSE). The AMCs typically appoint certain brokers as Authorized Participants/Market makers to provide continues liquidity. However the actual liquidity and depth depends on the seriousness with which these players do their duties. Illiquidity in wake of lack of buyers/sellers in the market could lead the price of ETF to quote at a discount to their NAVs. This is more the case when there is a sharp rise or fall in gold price in a small period of time. c. Is Corpus of a Gold ETF important or relevant? Is the movement of corpus over time important? AUM of Gold ETF category has grown remarkably from Rs.96 Crore in March 2007 to Rs.11,477 Crore in October 2012. Part of this reason could be rise in gold prices. In case of schemes that show consistent rise in corpus, the liquidity in the market improves with the passage of time. d. Why is Reliance Gold ETF NAV quoting at a steeper discount to the spot price than others? One probable reason for the 5.9% discount of Reliance Gold ETF’s NAV to spot gold price could be that during the initial days Reliance Gold ETF allowed facility of creation/redemption of units in creation unit size to large investors (in addition to Authorised Participants – allowed by all Gold ETFs). This facility resulted in the AMC bearing some losses. Subsequently this facility was withdrawn for large investors in February 2009. In the meanwhile its NAV dipped due to this.Gold, Gold ETF and Gold FoF Retail Research
  33. 33. 33XVI. FAQ: contd…. Discount of NAV of R* Shares (Reliance) Gold ETF to spot price since inception: 13% Discount of NAV of R* Shares Gold ETF to spot price since inception 10% 7% 4% 1% -2% -5% Nov-07 Feb-08 May-08 Nov-08 Feb-09 May-09 Nov-09 Feb-10 May-10 Nov-10 Feb-11 May-11 Nov-11 Feb-12 May-12 Nov-12 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Analyst: Dhuraivel Gunasekaran. (Database sources: World Gold Council, AMC Sites, NAVIndia, Ace MF & Newspaper reports) HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435Disclaimer: Mutual Fund investments are subject to risk. Past performance is no guarantee for future performance. This document hasbeen prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to bereported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy anysecurity. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and itshould not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein.We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document.This report is intended for non-Institutional Clients.Gold, Gold ETF and Gold FoF Retail Research