Gold records biggest fall in two mths

New Delhi: Gold on Thursday recorded its steepest fall in over two months and lost Rs 800 to Rs 28,140 per 10 grams, on frantic selling by stockists on weak global trend and sluggish domestic demand. 

    Gold had plunged by Rs 835 on October 5. Traders said selling pressure gathered momentum, as the metal in overseas markets dipped below $1,600 an ounce on deepening euro-zone debt crisis and boosting the dollar. In addition, reduced offtake on the domestic front due to the end of the marriage season also weighed on the yellow metal's prices here. 
    On similar lines, silver tumbled by Rs 3,200 to Rs 52,600 per kg, on fall in demand from industrial units and silver coin manufacturers. Gold in global markets, which normally sets the price trend on the domestic front here, tumbled by $54.40 to $1,576.50 an ounce and silver by 6.10% to $28.96 an ounce in New York last night. PTI

Is it time for commodity PMS? 15% is the fall

that the Indian market has witnessed over the past year, with the AUMs of equity funds and ETFs falling by 0.62% in September this year. It's to deal with such uncertainties that investors are looking for alternative investment options, such as commodities, which are currently witnessing a rally. In fact, the AUM for gold ETFs increased by 7.9% in September. Does this mean that portfolio management services (PMS) for commodities have become inevitable? Shobhana Chadha spoke to financial experts and found they are unanimous on the need for portfolio diversification through commodities and introduction of advisory services. However, they differ on whether small investors should make use of the service.

Naveen Mathur Associate Director, Commodities, Angel Broking Yes, but... 
Portfolio management services should be allowed only for those commodities whose prices are driven solely by the international markets. This will help avert the risk of prices being driven by large market players. In India, the prices of globally traded commodities, such as bullion, base metals and energy, mirror the international market prices and are not driven by the Indian demand-supply fundamentals. Hence, PMS in these commodities will not be risky. However, the reverse may happen in the case of commodities that derive their prices from domestic fundamentals. For instance, PMS in agricultural commodities may cause an upheaval. Inflation in agricultural commodities is a sensitive issue and, hence, the related segments involve massive government intervention. The fear of PMS funds driving the prices of essential commodities will increase such interference, which will significantly diminish the pragmatism of PMS in the segment. 
    Overall, PMS in commodities will help investors in the Indian market to diversify their portfolios judiciously and make the best of commodity investment. Commodities offer excellent returns, especially in times of high inflation and market uncertainty. As a result, they help the investors mitigate the impact of negative real returns or losses from other asset classes in their portfolios. The Indian investor is finally becoming mature as he has started regarding commodities as a potential investment option. The introduction of smaller contract sizes has helped even the small, savvy investors to benefit from trading in commodities. Convincing investors has not been difficult as they realise that diversification is the need of the hour. 
    If PMS in commodities is started, it is likely to be targeted towards investors who have not yet ventured in this segment and regard the futures market as a new concept. Small investors will surely benefit as they won't be involved in the day-to-day monitoring of the portfolio. Since it is difficult for them to read and research the complex commodities market, they can benefit from the expertise of an experienced manager handling their portfolio. The service will ensure that they derive the benefits of investing in commodities without the hassle of understanding the nitty-gritty of trading. There is also a likelihood of the PMS reducing volatility in the commodity market.

Naresh Pachisia 
Managing Director, SKP Securities 
Yes, but... 
PMS for commodities should not have exposure to the futures market. The objective of such a service is to help investors meet certain financial objectives, and this may not be possible if they deploy funds in trading instruments like commodity futures. Though portfolio advisory services in commodities were allowed earlier, these were banned by the commodity markets regulator, Forward Markets Commission (FMC), in 2007. There was lack of awareness about commodity futures when trading was introduced, and as a result, investor participation was low. This resulted in low income for brokerage houses, some of which started packaging commodity futures trading as PMS to give a push to their own revenues. The move made the futures trading come across as more comprehensible to investors, since they were being given the impression that their commodity portfolios were managed by experts who understood the fundamentals of the asset class. Brokerage houses assumed discretionary powers from investors to take positions based completely on technical analysis. In short, there was an attempt to position actual trading as investing in people's minds. This was naturally imprudent and the FMC did a good job by banning it. 
    There is no doubt that commodities, especially those like precious and base metals and crude oil, can be a useful asset class for investors. They can exploit these as useful investment options since their prices are impacted by macro-economic factors. However, PMS for commodities should include investment products, such as demat holding and exchange traded funds (ETFs). The commodities market in India is in still evolving. Over time, spot market trading will gain popularity and ETFs in other commodities will be introduced. The commodity exchanges will also come out with more innovative investment products. While all this may take some time, this is what PMS for commodities should ideally constitute. 
    Commodities is a relatively risky asset class and it may not be advisable for small investors to put their money in these. They have the option of better asset classes to deploy the limited amount of investible funds to meet their financial goals. Ideally, they should only put in additional funds for investment in commodities.

Dharmesh Bhatia 
Associate Vice-President, Research, Kotak Commodities 
Yes 
All globally traded commodities should be included in PMS for commodities. Even agricultural commodities, such as gram, soybean and other edible oils and pulses, should be included in the ambit of these advisory services. Separately, these should include all avenues of the commodities market—spot (physical), futures and options. Presently, options trading in commodities is not allowed in the country. However, once the Forward Contracts (Regulation) Amendment (FCRA) bill is approved, options trading could well be permitted. The FCRA Bill is currently awaiting the nod of the parliamentary standing committee. The bill seeks to empower the commodity markets regulator and allow several new commodity-related instruments. If all market avenues are allowed in the PMS for commodities,investment strategies can be implemented and even structured products can be introduced to cater to the needs of all types of investors. Portfolio managers can take positions in spot markets for the clients who want to be long-term investors. The aggressive investors, who are comfortable with the concept of speculating, can be made to take bets in the futures market. They can even hedge their risks through options. Restricting PMS to only a few parts of the market will reduce the scope of investment in commodities to primarily traditional items, such as gold and silver. Hence, the main purpose of including commodities in the portfolio—diversification—will not be achieved in a wholesome manner. Demat holdings and long-term bets are not possible in the case of agricultural commodities as they are perishable by nature. If investors want to include such commodities in their portfolios, they will have to take carefully analysed positions in the futures market, and this means that will need the support of portfolio advisers. 
    Even mutual funds and banks must be allowed to offer PMS as the commodities market is very small in India and needs more depth and liquidity for appropriate price discovery. The phenomenon is in direct contrast to that in the global markets, where the trading volume in commodities is at least four times the level of trading in stocks. Once more liquidity sets in, even small investors will be able to consider the commodity space as an investment option. In fact, they can do so even now, at least for the commodities whose prices are more trend-driven, such as base metals and edible oil complex, which includes castor oil, groundnut, sunflower seed and others.

COMMODITY WRAP Copper, Silver Steal the Show

European leaders' agreement on bailout pushed nearly all commodities to their monthly highs. Besides this, positive data concerning the US economy also helped spur the bullish sentiment in the financial market. Precious metals, crude oil, base metals and agriculture commodities all witnessed a positive run-up in prices. Copper, followed by silver, was the top gainer among non-agriculture commodities. In the agriculture commodity basket, rubber, followed by cotton and palm oil, was the major gainer.      COPPER  Copper switched from being the largest loser in the last week to being the top gainer among the base metals pack this week. Consensus over containing European debt problem offered a relief rally in the red metal. The uptrend, nevertheless, seems to be more of a blip as the long-term price trend is likely to remain bearish due to weak demand-supply fundamentals. The weekly gain was curtailed following higher-than expected drop of 4% in Japan's industrial output for September when compared with the previous month. It was the first decline since the earthquake and tsunami in March.

Gold ETFs Dazzle Investors on Dhanteras

Over 2,550 kg gold ETFs were traded on the day, 8.5 times more than last year

Gold exchange-traded funds (ETFs) witnessed record trading on Dhanteras, a day considered auspicious for buying the yellow metal. More than 2,550 kg worth of gold ETFs were traded on the exchanges this Dhanteras, taking the total value of trade to more than . 650 crore in a single day, nearly 8.5 times higher than last year. 
The heavy buying was prompted by perception of gold as a hedge against inflation than mere festive buying, said experts. Buying was also boosted by the massive returns that investors earned from their gold investments last dhanteras. 
Investors, who spent on gold on dhanteras last, year have seen their investment appreciate by more than 38%, much higher than returns from other asset classes such as equity or debt. However, experts said that a correction in gold prices can't be completely ruled out in the short-to-medium term, particularly if inflation starts easing. "It is difficult to predict the movement of gold over a shortterm period and the ongoing price spurt is clearly an outcome of global uncertainties, inflation and rupee depreciation," said Chaitanya Pande, head of fixed income with ICICI Prudential Mutual Fund. However, once inflation starts easing, gold can be expected to underperform, he said. 
"But as gold is not correlated to other assets, it carries significant importance as a diversification hedge," he added. 
Attributing the decline in rupee as one of the main reasons for the surge in gold prices, he said, "While dollar gold has appreciated by about 13% since July this year, appreciation in rupee gold has been about 23%." Concurring with this view, Lalit Nambiar, fund manager and head of research at UTI Mutual Fund, said, "Gold is appreciating as investors are losing trust in currency. With currencies getting debased globally, gold is gaining firm ground as an investment avenue as it retains value in real terms. Given the current scenario, we don't anticipate a bear case for gold." 
bakul.chugan@timesgroup.com 

Gold Rush a Speedbreaker in India’s Growth Story

Savings of Indian households locked in yellow metal don't reach economy

    The glitter of gold is taking the shine off India's growth story. According to World Gold Council, India's gold imports rose 60% in April-June 2011 from a year ago, as people snapped up the timetested hedge against inflation. 

India has always been a huge gold consumer, but the yellow metal is now our second-biggest import, behind crude, up from fifth place in 2007-08. But, this fascination with gold could be a reason why growth seems to be flagging. Money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in bank lockers. "Money spent on gold is mostly wasted because it's only hoarded and simultaneously excluded from the financial inter-mediation system," said Abheek Barua, chief economist, HDFC Bank. As money has flowed into gold, India's household savings have moved away from productive financial assets, falling to 9.7% of GDP during 2010-11 compared with 12.1% in the previous year.  This shift away from financial savings can dent growth, but it's hard to say by exactly how much. "To the extent there is a shift from household savings in financial assets towards gold, which we know has been happening, it would lead to some loss in the GDP growth," said Indranil Pan, chief economist, Kotak Bank, "although it's hard to gauge the magnitude of the loss." Gold imports are up nearly half a percentage point of the GDP in the last three years, implying that much more of savings is getting locked up in an unproductive asset. That much of the gold is imported also worsens the current account deficit. The hunger for gold seems to have been triggered by increased risk aversion after the global financial crisis.  Surprisingly, the soaring prices of gold, now at three-decade highs, haven't driven buyers away.  Of course, national accounts do not consider gold as physical saving – gold imports are considered as consumption – but, as far as buyers are concerned, gold buying has a high savings consideration. "Gold is the preferred form of savings for people and there's nothing one can do about it. It is, therefore, important to make financial savings more attractive," said C Rangarajan, chairman, Prime Minister's Economic Advisory Council. The fact that India doesn't produce much gold but imports most of the stuff increases leakages from the economy. "If instead, the same money was spent on other assets like homes, the money would have circulated in the economy," said Sunil Sinha, senior economist with Crisil, a ratings agency.  Pronab Sen, member, Planning Commission, agrees with the argument that high gold imports are not good for the economy, but he doesn't feel it is material in the current economic environment. "Since investments aren't really taking off at the moment, to talk about this in terms of inadequate savings isn't necessarily true," Sen said. "This shift to gold could become a problem over time as household savings in productive assets fall, but not right away."

Forget Gold and Silver, Equities will be Your Best Bet for Wealth Creation

Expert Take

Equities have lost a bit of their sheen recently, as the markets have been range-bound for quite some time. Many retail investors seem to have been attracted by gold, with the old wisdom thatgold is the best investment once again holding sway. In fact, some are now shifting to silver, following its meteoric rise even ahead of gold, doing the exact opposite of what the most successful investment sutra stipulates: buy low, sell high. 

But let's dig a little deeper and see if there is any fundamental reason that will further fuel this rally in precious metals. In the case of silver, global production increased by more than 120mn ounces in the past six years. But, industrial demand increased by only 100mn ounces, while the demand from the photography segment actually declined by 100mn ounces due to digitalisation. Hence, there has been no increase in net genuine demand at all for silver! So, where did all those 120mn ounces of extra silver go? The large chunk has been absorbed by investors, with no reference to real-world demand-supply dynamics! (Source: The Silver Institute). 
Since 1985, silver prices have exhibited an almost 95% correlation with gold prices. So, when silver disregarded its own demand-supply dynamics as well as its correlation with gold prices and its price rose by a gravity-defying 3x in the last eight months, it was only a matter of time before it retreated. Even at current levels, I would advise investors to tread with caution as silver prices are still outperforming gold by 80% from a one-year perspective. Let's look atgold. The noble metal has given an almost 20% return per annum over the last three years. With gold prices at all-time highs, one needs to be doubly sure of its underlying fundamentals. Not having significant industrial uses, gold's value lies in its perception as a hedge against inflation, as a safe-haven investment — a perception ingrained since ancient times. But has the inflation hedge logic really worked in the past few decades? In fact, adjusted for inflation,gold has given negative returns since 1980. (Source: GFMS). 
Even in absolute terms, gold has been known to stagnate for years and years before giving returns. Is it really a big surprise then that the modern financial systems have over the past several decades allowed people to invest in productive financial assets that accelerate GDP growth (case in point, China and now India)? 
Naturally, equity investors have been able to enjoy a well-deserved share of this immense wealth-creation. Taken over a 10-year period, equity markets of BRIC economies other than China have given between 15% and 23% CAGR returns; China has given a similar return over a 20-year period! 
Fresh equity capital raised by corporates, which drives real GDP growth, was averaging about 1.1% of global GDP in the years preceding the Lehman crisis. After touching a low of 0.5% in 2008, it has recovered to about 1% in 2010. Gold consumption – inherently an unproductive investment – on the other hand has more than doubled relative to the global GDP. It is only a matter of time when inadequate investments in productive assets lead to shortage, which, in turn, would boost corporate profitability and generate handsome returns for investors who enter into equities at the current modest valuations. 
Indian markets will, in the next few quarters, start looking at FY2013 earnings and by then inflation worries are likely to be behind us and earnings growth is expected to be a healthy 18.5%. With valuations also attractive, FII inflows may also increase again, considering that India, even more than China, is today arguably the emerging economy with the strongest long-term prospects. 
The fundamental fact is that investing in equities over a longer period gives investors the highest compounded returns amongst all asset classes. This is because the economy inevitably marches forward and in the face of five years of 12%-14% nominal GDP growth, the equity markets also inevitably do go up. Then the one-month downside risk of 10%-15% due to inflation or fiscal deficit or myriad such noises just become irrelevant. Moreover, if you invest regularly, then you will be able to average out these gyrations and on a compounded basis, over the long-term you can generate significant returns from equities.

Dinesh Thakkar 
CMD 
Angel Broking

Gold ETF Assets Jump Four-fold in Just One Year

Launch of new fund offers and rise in yellow metal's value help in fund-raising

The growing acceptance of exchange-traded funds (ETFs) among retail and high networth individuals, launch of new fund offers and a rise in the value of gold have quadrupled assets under management (AUMs) of gold ETFs over the past year. AUMs rose to Rs 4,800 crore as on April 30, 2011, up 180% from a year ago when they were at Rs 1,171 crore even as gold jumped 33% to Rs 22,937 a tola (10 gram) during the same period. 

"Gold has been accepted as an asset class and investing through ETFs is being increasingly viewed as a legitimate way to hold gold in demat form," said Devendra Nevgi, founder and principal partner, Delta Global Partners, a company that provides commodity research to overseas investors. 
Two new gold savings schemes were launched during the period under review -- Reliance Gold Savings Scheme, which mopped up Rs 141 crore, and Kotak Gold Savings Scheme, which attracted inflows of a little over Rs 5 crore. Both these schemes invest into ETFs run by Reliance and Kotal mutual funds and contributed to net inflows into the funds. The gold schemes are in addition to the 10 gold ETFs, including the likes of Benchmark Gold ETF with AUM of Rs 1703.49 crore as on April 30, 2011, UTI Gold ETF (Rs 497.65 crore) and Reliance Gold ETF (Rs 434.38 crore). Gold demand has been boosted by a weak dollar and worsening sovereign debt of some Eurozone members as investors the world over flock to hard assets like bullion to protect themselves from the falling value of paper money. 
"The metal has value as a portfolio hedge and ETFs add to the convenience of holding gold in demat form for existing equity market holders," said Suresh Nair, director, Admisi Commodities. "However, a fall in gold can expose investors to big losses. However, being long-only ETFs, an investor with a view that gold prices could fall can't short-sell gold ETFs here. I think commodity futures market scores over ETFs by allowing an investor to short-sell by paying a small margin," added the broker. 
The disadvantage of a gold ETF is the tracking error, where the fund's net asset value might not accurately reflect the movement of the underlying asset. The tracking error arises out of cash held by ETF and expenses charged on managing the fund. Net inflows into the ETFs almost trebled to Rs 919 crore during January- April from a year ago, according to Association of Mutual Funds of India. Average gold price in Mumbai rose by 25% to Rs 20,937 a tola over the comparative period, exceeding returns from the Sensex,which generated a negative 11%, and fixed deposits of 9-9.5% by miles.

How long will gold shine?

BULLION

Gold prices have touched an all-time high. It's still a good time to buy the precious metal as prices are expected to rise, though at a lower rate than in the past few years.

When ET Wealthcame out with a story on gold, 'Now is the time to pick gold' on 28 March, we had written about how the price of gold would reach 21,700 per 10 gm over the next two-and-a-half months. It's flattering to be proved right. But it has also been a humbling experience as we got our timeline wrong and underestimated the lure of the glittering metal. Exactly a month later, on 28 April, the price was 22,470 per 10 gm. And it continues to shoot upwards. The price of gold is touching new peaks and the boosters that are pushing it forward are firmly in place.
    The US economy continues to stumble and there doesn't seem to be any hope that it will find a firm footing soon. The Eurozone crisis virus seems to be spreading wider and faster, with no antidote in sight. The unrest in Middle East and North Africa is gaining momentum. Oil prices refuse to cool and production in Libya has almost come to a standstill. Iran, which currently holds the rotating presidency of Opec, is dithering over meeting before the fixed date of 2 June to discuss increasing the supply of oil and, hence, bring down the prices.
    The bleak international financial scenario is why investors are preferring to place their faith and money in a 'hard' asset rather than paper currency. It's also the reason new investors are streaming towards this asset, leading to an increase in its demand. China's appetite for gold is almost turning into a gluttony and central banks across the world are veering away from the weakening dollar and boosting their bullion reserves. "Gold is the only currency that cannot be printed and supplied. It's a mined product and the huge gap between demand and supply will continue to push up prices," says Lakshmi Iyer, head of products, Kotak Mutual Fund. "If the public debt in the US is not contained, the dollar will continue to depreciate. Gold will then become the proxy candidate and will be in high demand. Inflation is already on the rise in emerging markets, with oil and food prices going up, and it has now begun to inch up in the developed markets too," says Devendra Nevgi, founder and principal partner, Delta Global Partners. As higher oil and food prices drive up inflation, inflation-adjusted interest rates remain negative. So, investors don't lose out if they hold a non-interest bearing asset, such as gold.
Is it time to book profits?
It will be, but after more than a year. If you're interested in selling gold, be patient because prices are going to continue moving upwards. However, don't expect them to gallop as they did last year. "The price of gold will be up by 10% by the end of the year. The dollar is weak, global interest rates remain low and equities are lacklustre. So, investors are bound to flock towards gold," says Jayant Manglik, president, Religare Commodities.
    In a research report released recently, Goldman Sach's gold forecasts are $1,565 and $1,690 per ounce in six and 12 months, respectively, while Deutsche Bank's price outlook for this year is $1,571 an ounce. According to SMC Comtrade, the price in India is likely to touch 23,200 per 10 gm in the next 4-5 weeks.
    Other analysts predict that the rise could be much steeper. "The price will rise another $200 an ounce, reaching $1,700 by the end of this year, and it could surpass $2,000 an ounce in 2012," says Renisha Chainani, deputy manager for commodities research, Edelweiss Financial Advisors.
    As prices rise, it is possible that the demand for jewellery will taper down. However, the investment demand is unlikely to decline as the uncertain times are making everyone jittery. This is why as the price keeps rising steadily, so does the demand. "In the past few years, each time gold prices reached big round numbers—$1,000, $1,200 or $1,400 an ounce—buying interest abated a little. But now, even with the price at an all-time high of $1,500 an ounce, physical demand remains firm. Most consumers and investors believe gold will hold its purchasing power. After all, it can't be manufactured at the whim of a central bank," says Chainani.
    While most experts suggest that gold should form 10-15% of an investor's portfolio, others are more bullish. "Currently, you could increase your bullion holdings to 25% of your portfolio by starting a SIP in e-gold. When the situation changes, re-balance your portfolio," says Manglik.
What could bring down the price?
A few factors, such as lower oil prices, a rally in the global markets and stability in the Middle East and North Africa, could slow down the pace at which the price of gold is rising. However, the first sign that prices are going to come down is when interest rates rise. Most people prefer investing in deposits as they earn an interest on their money. On the other hand, gold lies idle and earns no dividend, coupons or rental income, unlike other asset classes. So, when interest rates rise, investors move towards fixed deposits (see graph above). This could lead to a fall in the demand of gold and, hence, a correction in its price.
    "A key indicator will be the improving health of the US economy and the strengthening of the dollar," says Manglik. However, a weak dollar is favourable for us as it makes dollar-priced gold cheaper in India. So the rise in price of gold in rupees will not be as high as in the international market.
    Also, as the price of gold shoots upwards, 'scrap' gold, the metal that is resold to jewellers, starts coming into the market. Though this increases the supply and may dent the price rise, the margin by which it does so is not significant.
    We would like to be right on target this time around, but just in case gold stumps us again, we're heading straight to the nearest jeweller.

Investors Buy Risky Papers to Cash in on Silver Rally

Wealthy investors pool in over 400 cr to buy debentures linked to the metal's fortunes

any rich investors are buying risky, privately-sold papers to ride a stunning rally in silver which they hope will go on for a while even as some fear it's nearing a bubble.
At least three finance firms, a large bullion house and the portfolio management division of a venture capital fund are selling debentures and specially-designed instruments whose returns mirror the fortunes of silver.
According to market estimates, hundreds of well-heeled investors have put in more than 400 crore in such structured products, many of which do not offer a capital protection. Investors receive no fixed or guaranteed return and may end up losing a slice of their money if there is a crash in the price of silver. But if there is a surge in price, between 80 and 90% of the gains are shared with investors who in some schemes have to pay an upfront fee, similar to entry loads charged by mutual funds, to the seller of the debenture.
Since end-November, silver has risen 50% to 63,930 while gold is up by just 4% during the same period. As property prices looked shaky and stocks turned choppy, wealthy investors — known as HNIs or high net worth individuals in the financial market — found silver irresistible. Their counterparts in other parts of the world invested in exchange traded funds with silver as the underlying asset. But in the absence of silver ETFs — a product that is awaiting the capital market regulator's approval for the last two years — Indian HNIs snooped around for silver-linked instruments.
Financial intermediaries, bullion dealers and commodity exchanges were quick to sense the opportunity. Brokerages and other entities floated special purpose vehicles to sell fancy debentures while commodity exchanges began aggressively marketing silver futures and spot products.
RISING FOOD, CRUDE PRICES CAST A SHADOW Moving Towards Lifetime High
"Putting money in a 30-month or 40-month unsecured debenture with no capital protection is just like investing in stocks. It's no more or no less risky... It's up to the investor to take a call on whether silver will continue to rise. But investors must be confident of the credibility and competence of firms issuing such products," said Anup Shah, a chartered accountant whose firm Pravin P Shah & Co has advised some of the issuers. The money raised by the issuer is invested in silver. There are combinations of investment strategy where the fund manager may invest in physical silver or silver futures. The fund manager may also try to cash in on the arbitrage opportunities between the spot and futures prices. According to a broker, investors have to be careful because the commodity trading desks of some of the large brokerages are not as smart as their stock trading divisions. However, with silver crossing . 60,000 a kilo, many investors are insisting on silverlinked instruments that are less risky and promise to protect their capital, at least a large part of it. For capital protection products, around 80% of funds collected are invested into an instrument giving assured returns, say, an FD, of 2-3 years. "More than the magnitude, the speed with which silver has risen has attracted investor interest," said Jayant Manglik, president, Religare Commodities. "Since mid-June last year, silver on the overseas market has more than doubled to $42 an ounce and is moving towards its lifetime high of $50 tested thirty one years ago. Indian prices have reflected the move overseas......I feel investment rather than industrial demand, especially over the past four months, has been the prime driver of the rally," he said.
But even as a spiralling silver evoked memories of the silver bubble of the late '70s, engineered by Hunt brothers — sons of a Texas oil billionaire — and the dramatic crash of January '80, investors across the world bought silver. Besides the absence of ETF, another reason why complex debentures found takers in India is due to problems investors face in storing silver. While . 21 lakh can be parked in a one-kilo gold bar tucked away in a vault, silver of the same value will occupy an entire cupboard.
According to a well-known broker from an integrated financial services group, the average investment ticket size is around . 20 lakh, with each debenture priced at . 1 lakh. For many debentures, the underlying is the near month traded future in a comex. The product, which was launched last year, turned popular over the past three months during which silver has been moving rapidly towards its 1980 record price of $50 an ounce (31.10 gm). What matters to investors of such products is the availability of an exit opportunity when they feel the market is overheated.
Gnanasekar Thiagarajan, director of commodity research company Commtrendz, forecasts another $2 an ounce increase in silver to $45 in the near term after which it could witness a fall to $35. "The goldsilver ratio is hovering over 30, which has seldom been seen. My expectation is of a sharp correction once it tests $45. My reading suggests $35 is a strong support," said Thiagarajan. Over any 10-year period, the rise in gold and silver has been more or less equal. "Since gold has risen every year since 2001 and silver has relatively lagged gold for the greater part, the metal began to make up for the lag since the previous year, felt Manglik.
Also, since gold has become costly — prices are over . 20 lakh a kilo — it is leading to a shift in investor preference for silver which at around . 64,000 a kilo is relatively much cheaper," felt Manglik.

With metals, put the shine in your portfolio

METALSPhysical route: It is impossible to take long-term positions in industrial commodities in the physi- form as it involves huge storage space. While it is possible to buy precious metals, such as gold, silver, platinum, etc, in the physical form (as they consume much less space), investors opting for this route have to face several other problems like the purity of metals, making charges and huge margins imposed by jewellers. Margin trading in commodity exchanges: Though investors can take positions in commodity exchanges by paying a small margin, it is not suited to long-term investors. This is because they have to roll over their position on a regular basis. Another problem is the tax treatment. Since there is no delivery of assets or securities, the gains will not be treated as capital gains but as speculative income. ETFs: Exchange-traded funds (ETFs) are another way of getting rid of the problems mentioned above. Since these are classified as securities, investors can also avail of a higher tax benefit. For example, the cut-off period for long-term capital gains is one year compared to three years for physical holding. E-commodities: This is the latest entrant on the block and takes care of most of the problems mentioned earlier. It is an investment product that allows you to hold commodities in the demat form on an electronic trading platform, set up by the National Spot Exchange. The product allows you to buy, accumulate, hold and sell commodities and also provide the option of physical delivery against the surrender of the product. Commodity experts believe that E-Series is the finest and the most feasible investment option for those wanting to diversify their portfolios in commodities. Metal mining companies: Though several investors use this route, the volatility in commodity stocks will be much higher than the underlying commodities. This also negates the purpose of investing in commodities—to diversify your portfolio. Metal prices have risen sharply and analysts believe there is a lot of steam left in them. Here's what you need to know before adding this new asset class to your investment portfolio. SHOBHANA CHADHA      There is an increased investor interest in commodities currently because this asset class has outperformed other traditional assets. We are not talking only about gold, which has generated good returns over the past few years. While silver prices have more than doubled in the past year, copper has outperformed the Sensex during the same period.      However, these spectacular returns should not be the only reason for investing in metals. The basic objective should be to diversify the investment portfolio by adding a new asset class. Since commodities are real assets (compared with others like stocks), they react differently to the changing economic situation and help you reduce the overall portfolio risk.      Commodities also offer a hedge against inflation. High inflation results from the increasing commodity prices and the best way to shield your finances from the price rise is to have a direct stake in commodities. In this manner, the loss from the rise in overall prices will be nullified by the gains from the increase in commodity prices.  Is it worth investing now?  While the past performance has been spectacular, the moot question is, will metals continue to shine in 2011? Which metal is likely to give the best returns now? We reached out to industry experts and commodity analysts for answers. Most of them believe that there is still a lot of steam left in the metal pack. "The fundamentals remain strong for precious metals as well as base metals, and they can definitely form a part of a retail investor's portfolio," says Jayant Manglik, president, Religare Commodities.  Look beyond gold  While precious metals have rallied in the past two years because of the massive quantitative easing in the West, base metal prices have increased due to supply shortages and a recovery in global industrial demand. Analysts believe the demand for these metals will continue to be bouyant and are advising investors to look beyond gold. "The yellow metal has already seen a 10-year bull run and the world is expecting monetary tightening in the future, which may take away the shine of gold," says Vandana Bharti, associate vice-president, commodity fundamentals, SMC Global. "With global industrial production recovering and risks of sovereign crisis reducing, gold might underperform some other metals," says Devendra Nevgi, principal partner, Delta Global.  Silver/platinum  The case is stronger for metals such as silver and platinum which have industrial uses as well. "Silver and platinum are more reliable from the long-term perspective as there is an industrial as well as investment demand," says Bharti. In fact, it was the industrial demand for platinum that led to a spike in its price in 2010. The metal's versatility in industrial applications and increased preference for platinum jewellery indicate that the metal could rally in the coming months.      Ditto for silver, which outperformed gold and other metals in 2010, generating returns of over 72% due to the rise in the investment demand by a whopping 184%, along with the rise in its industrial applications. "The demand for silver will continue to rise due to its ability to be a safe haven and growth in the industrial sectors in the advanced economies," says Naveen Mathur, associate director, commodities, Angel Broking.  Copper  Analysts suggest adding another lucrative metal to your shopping cart—copper. It prices are up because consumption is running ahead of supply, mine production is slow (growing at an average of 3.5% over the past five years), and China's insatiable demand. China's refined copper imports rose by 24% in 2010. "The copper story is expected to remain intact as the supply shortages are likely to continue," says Mathur.  Zinc  Commodity experts also expect that the recent tsunami in Japan and floods in Australia will put a further pressure on the supply of industrial metals. "The reconstruction should drive up the zinc prices. Right now there is surplus supply," says Maneesh Kumar, MD, Burgeon Wealth Advisors.  Tread with caution  While there is a near consensus that metals such as silver, platinum, zinc and copper are good investments, you should not ignore the risks. There can be a 10-15% correction in prices. "However, this will only be an opportunity," says Kunal Shah, head of commodities research, Nirmal Bang Securities.      Bigger risks can come by way of monetory tightening by the developed world. Rising energy prices and inflationary concerns suggest that the easy monetary policy in the developed markets may not last long. For example, the short-term interest rates in Europe have already moved up on the expectations that the European Central Bank (ECB) may start raising rates after its April 2011 meeting. There is also a near consensus emerging that the US Federal Reserve may end the quantitative easing programme in June. So, expect a deeper cut in      commodity prices once the US Fed starts monetory tightening.  How to invest in metals?  How to invest in E-Series