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Gold as an asset class

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  • The supply deficit is certainly not new, and it’s not enough on its own to explain the price rally. That’s why it’s important to look at the components of supply and demand, to get a sense of what drives each of them and what the likely prognosis is for each: how quickly is supply likely to respond to increases in demand? Is an increase in one form of demand likely to substitute for another form, rather than be additive? What is the relationship between price and each component of supply and demand?
  • Gold has been in the news a lot since it moved up to the levels not seen since 1980 which has left many people wondering whether gold is not overbought and exactly what fair value might be. The NCDEX is not in the business of forecasting the gold price – in fact we’re not allowed to. But I believe it’s a useful exercise to set the recent gains in real terms, which is what you can see here, and what most investors ought to care about. And in real terms, the gold price has only just recovered ground lost in the early 1990s. The brown and black lines shown on this chart trace the real gold price in constant 1968 prices and in constant 1975 prices. In real terms, the gold price has increased only modestly over the last six years – particularly when compared to the giddiness of other commodity markets that are less liquid. The background that led to the price spike in 1980 was quite extraordinary- : US inflation in double digits; crude oil around $40/barrel; equities approaching the end of a prolonged bull market; Soviet Union invading Afghanistan; By contrast, the rally that began in 2001 has been supported for the most part by continuing strength in demand against supply that simply has not managed to keep pace.
  • Transcript

    • 1. 1Gold as an Asset Class
    • 2. 2 Contents1. Introduction to Gold Market.2. Gold Demand & Supply Trends.3. Why invest in Gold ?4. How to take an exposure in Gold. Gold5. Is the price of Gold getting real ?6. Gold at NCDEX
    • 3. 3 Forward-looking statement (disclaimer)The information and opinions contained in this presentation have beenobtained from sources believed to be reliable, but no representation orwarranty, express or implied, is made that such information is accurateor complete and it should not be relied upon as such. Thispresentation does not purport to make any recommendation or provideinvestment advice to the effect that any gold related transaction isappropriate for all investment objectives, financial situations orparticular needs. Prior to making any investment decisions investorsshould seek advice from their advisors on whether any part of thispresentation is appropriate to their specific circumstances. Thispresentation is not, and should not be construed as, an offer orsolicitation to buy or sell gold or any gold related products.Expressions of opinion are those of the NCDEX only and are subject tochange without notice.
    • 4. 4 Above the Ground Stocks of Gold Global Stocks - 1,55,500 tons Lost & (end 2005) = Rs 148,00,000 cr Unallocated = $ 3,200,000 mn. Industrial & 2% Dental 12% of which, Private Jewellery Indian Public holds 10% or Investment 52% 15,000 tons +(Bars & Coins) 16% = Rs 14,00,000 cr compared to, Govt & Banks 18% Rs 800,000 cr in banks Rs 90,000 cr in Mutual Funds Gold Price: Rs 9,500 $ Price: Rs 46
    • 5. 5 Annual demand for Gold exceeds primary supply Mine Production and Total Demand for Gold 4500 500 Mine Production Total Demand 450 4000 Gold price (annual average) US$/oz 400 3500 350 3000 300 2500Tonnes US$/oz. 250 2000 200 1500 150 1000 100 500 50 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Data: GFMS Ltd. Newly mined gold does not satisfy the demand for gold jewellery each year
    • 6. 6 Steadily increasing Gold jewellery demand $ m io. 25,000 Italy 20,000 UAE 15,000 Saudi Arabia Turkey 10,000 China 5,000 USA - 1992 1994 1996 1998 2000 2002 2004 India• The top 7 countries account for 60% of the total Jewellery consumption.• Jewellery consumption increased by 10% over last 5 yrs & 18% in the last 3 yrs
    • 7. 7Investment demand for Gold fuelling the price increases • Investment Demand up by 35% over last 5 yrs & 56% in the last 3 yrs (in US$ terms)
    • 8. 8 Why Invest in Gold ? Gold vs inverse of trade- weighted dollar• Currency hedge 140 – Inverse relationship 120 between gold and dollar 100 80 Gold• Effective portfolio diversifier US$ 60 93 94 95 96 97 98 99 00 01 02 03• Currency hedge USA: gold and consumer price indices (log scale; 1800=1) 100 Gold price• Gold is a deflation & inflation Consumer prices 10 hedge – Maintains purchasing 1 power over the long term 0.1 1800 1840 1880 1920 1960 2000
    • 9. 9 Risk – Return Analysis on a portfolio with GoldTracking of performance of Equity portfolio with gold over a 7 yrs period: Equity Gold Returns Risk 100% 104% 7.10% 100% 118% 3.60% 90% 10% 105% 6.50% 80% 20% 107% 5.90% 70% 30% 108% 5.30% Source: Financial Express Research
    • 10. 10Bullion Market in India
    • 11. 11 Introduction of Bullion market in India• Size of Market – Physical - India imports 600 tonnes gold per annum & 3500 tonnes of silver(approx). – Private holding of gold approx. 14000 tons – Futures (Derivatives) – the total average daily quantity being traded in futures market in India is 15000 Kgs of gold & 1000 tonnes of silver• Major Centers for Physical Gold Trading Mumbai, Ahmedabad, Delhi, Jaipur, Chennai, Hyderabad, Bangalore & Kolkatta
    • 12. 12NCDEX bullion contracts
    • 13. 13 Gold Futures ContractContract Size 1 kgTick Size Rs 1 per 10 gramPrice Quote Rs per 10 gramContract Months All monthsActive contracts 3Last trading day 20th of the monthDeliverable Size 1 kgDeliverable grades Not less than 995 fineness, bearing a serial number and identifying stamp of a LBMA refiner approved by NCDEXTrading Hours 10 am - 11:30 pmDelivery Location MumbaiMargin 5-7%
    • 14. 14Gold Futures Contract cont’d…• Daily Settlement Prices• Gold Bars from approved list of importers along with a refiners certificate• Minimum Deliverable Quality 995 fineness• Proportional price adjustment against deliveries of minimum deliverable quality
    • 15. 15 Silver Futures ContractContract Size 30 kgTick Size Rs 1 per kgPrice Quote Rs per kgContract Months All monthsActive contracts 3Last trading day 20th of the monthDeliverable Size 30 kgDeliverable grades Not less than 999 fineness, bearing a serial number and identifying stamp of a LBMA refiner approved by NCDEXTrading Hours 10 a.m. to 11:30 p.m.Delivery Location DelhiMargins 8-10 %
    • 16. 16Silver Futures Contract Contd… • Daily Settlement Prices • Silver Bars from approved list of importers along with a refiners certificate • Minimum Deliverable Quality 999 fineness • No discounts or price adjustment against qualities
    • 17. 17 Arbitrage opportunities in Bullion Contracts• Calendar spread arbitrage.• Arbitrage between NCDEX and MCX.• Arbitrage between Bank costing and NCDEX.
    • 18. 18 Arbitrage opportunities in Bullion Contracts• Calendar spread arbitrage. – 3 important parameters to be kept in mind while doing Calendar Spread : • Landed Cost of Gold/Silver. • Parity Price of Gold/Silver. • Trend in Bullion Prices- Whether the market is in Contango /Backwardation.
    • 19. 19Arbitrage between NCDEX & MCX• Arbitrage between NCDEX and MCX.• NCDEX-Pure Gold fineness 999.9 & exclusive Sales Tax.• MCX –Gold- 995 .0 fineness & exclusive of Sales Tax paid Ahmedabad.• Purity Difference- 0.49 %.• Net Difference -0.49 % premium on NCDEX Gold.
    • 20. 20Value Conversion – Gold & Silver Gold Parity Silver Parity Sheet sheet Spot Rate International(A) 628 Spot rate International(A) 11 Add: Commission(B) 1 Commission(B) 0.04 CIF ---( C) 629 CIF =(A+B) 11.04 Multiply Exchange Rate (D) 46.8 Exchange Rate © 46.8 CIF(E) = Rs (C * D) 29437.2 CIF IN Rupees (D) 516.672 Multiply this with E Conversion Rate 0.321457 Conversion Rate(E) 32.1507 (F)-Rs Per 10 grams= (D*E) 9462.794 Rs per Kg(F)= D*E 16611.36647 Customs duty 110 Customs duty 510 Landed cost (G) 9572.794 Final wholesale price per Kg 17121.36647 Add Octroi (0.10%of landed cost) 9.572794 Final Wholesale price per 10 grams 9582.36679
    • 21. 21 How to get an exposure to Gold?• Gold coins & Bars – Jewellers – Banks• Gold Mutual Funds (ETF) – Expected to be launched• Gold Futures – Futures Exchanges
    • 22. 22The price of Gold: getting real 800Real price facts: Gold, London PM fix (monthly average) 700 Real gold price, constant 1968 pricesIn real terms, current Real gold price, constant 1975 prices 600price levels correspond tothose of the early 1990s 500 US$/oz. 400 $600 in 1980 300corresponds to about 200$1500 in nominal 2006dollars 100 0 72 78 86 92 06 68 70 74 76 80 82 84 88 90 94 96 98 00 02 04 19 19 19 19 19 19 19 19 19 19 19 19 20 20 19 19 19 19 20 20
    • 23. 23