IN GOLD WE TRUST

The stability and growth shown by gold ETFs have been remarkable when compared to equity funds. However, it remains to be seen how long the gold rush will last, says Dhirendra Kumar, CEO,Value Research For many of us who have been investing in financial instruments, the relentless rise of old poses a problem because we have no easy framework in which to think of gold. Till as recently as a couple of years ago, gold lived in a completely different world from stocks, funds and debt products. There was no easy way of investing in gold except for buying it as jewellery or coins and bullion trading was a mysterious world that was inhabited by a different set of species altogether. Gold investing was very much an out-of-sight and out-of-mind phenomena.      Since then, the arrival of commodity exchanges, Gold Exchange Traded Funds (ETFs) and gold stock funds has made it trivially easy to invest in gold without having to worry about purity and physical security. Just as important is the fact that these have made gold easily comparable to other investments. When an investor looks at fund performance data onvalueresearchonline.com or any other mutual funds portal, he can't help comparing the returns of goldbased investments with equity-based ones. Since about 2005, gold's returns make it looks like a great investment compared to anything else. And it's not just the returns, but the stability when compared to equity that the investor notices. The steepest fall in gold since 2005 has been the 20 per cent it lost from March 2008 to October 2008.      When I talk to gold's new found fans, I find that there are two more factors that make them like gold, if only at a sub-conscious level. One is the simplicity of decisionmaking. Gold is gold and that's all there is to it-all the ETFs deliver identical results. Unlike an investor in equity or equity-backed products, there aren't hundreds of choices. Secondly, most Indians seem to come mentally pre-configured with a propensity to view gold as an ideal vehicle for safe long-term investing.      At an intellectual level, many of us have bought into the logic of why gold doesn't make sense. However, we are a gold-coveting culture and have descended from generations who have lusted after gold. It takes very little to convince us that gold is a great investment, even though the long-term evidence is decidedly patchy. Today, the value of gold is increasingly driven by the demand and supply of paper gold on financial markets. It is a financial asset and is clearly subject to the same volatility as other financial assets as investor interest flows in or out. We could well be in a gold bubble which is just as ephemeral as the stock or oil or real estate bubbles were.      However, it is undeniable that many investors have started buying gold-backed securities of one kind of another as short-term trading opportunities. In the mutual fund space, there are actually two distinct kinds of gold-related funds available. One is the straightforward Gold ETFs. These closely track the price of gold itself and deliver profits and losses that mirror investing in physical gold. The others are a couple of equity funds (one from AIG and the other from DSP BlackRock) that actually invest not in gold but in foreign gold-related stocks, like gold mining and processing companies. Interestingly, these funds seem to act as sort of highbeta versions of the gold price itself. Over the last one year, gold has gained 44 per cent but these funds have gained more than twice that. Will the gold run last? If you look around, you will see as many cheerleaders as sceptics. As for me, I'm almost certain that one of the two groups will turn out to be correct!  (Catch Dhirendra Kumar discuss this portfolio in Investor's Guide show on ET Now)