The age-old saying 'all that glitters is not gold' may have lost some of its impact in the minds of gold investors, especially after the battering that the precious metal recently received. Gold received its ultimate bear hug in mid April 2013, as the international gold price saw its biggest one-day decline since the 1980s, crashing by around 25% from its peak in August 2011. Indian gold prices also corrected heavily, but their fall from the peak has been less severe due to the depreciation in the Indian rupee. In India, the price of gold is dependent on its international market price, which is quoted in US dollar, as well as the rupee-dollar exchange rate.
Though this correction was long overdue, it must have taken several Indians aback. After all, we are the largest consumers of gold worldwide, and have got used to double-digit returns from this asset class over the past few years. With the free-fall in gold prices, the gold mongers pitching gold as a safehaven asset class have also magically disappeared overnight.
Most of the gold demand in India is through the jewellery route. However, the investment demand for gold has also been building up slowly and steadily over the years through the medium of gold ETFs and gold funds. Gold ETFs have been around in the Indian market since early 2007 but they started gaining traction in 2010, after seeing two consecutive years of 20%-plus returns in 2008 and 2009. At the end of 2007, there were only four gold ETFs with total assets of just Rs 467 crore. The years 2008 and 2009 together pulled in a net Rs 570 crore into gold ETFs. However, flows picked up to Rs 1,727 crore in 2010, and total assets managed by gold ETFs swelled to Rs 3,516 crore. The inflow in 2010 as a percentage of beginning assets (also known as organic growth rate) was a handsome 128%, indicating that the net inflow during the year was higher than total assets managed at the beginning of the year.
The year 2011 saw the introduction of gold funds, which became a popular vehicle of investing into gold ETFs for those investors who did not have a demat account. Gold ETFs registered a strong inflow of Rs 4,046 crore (organic growth rate of 115%) during the year, despite these ETFs posting returns in excess of 21% in the previous year. However, inflows tempered down in 2012 to Rs 1,826 crore (organic growth rate of 20%), and the category closed the year with around Rs 12,000 crore in assets. A bulk of the inflows in 2012 came in during the second half of the year, and the recent fall in gold prices must be pinching these investors hard.
The big question now is will gold prices recover and bring some glitters back on the face of those who have invested in gold, or will it continue with its southward trend? Frankly, my guess is as good as yours. Commodities tend to have a long cycle, and once the cycle turns-the downtrend tends to continue for a while. Common sense suggests that you are not likely to see the same sort of blistering returns that gold has seen in the past, at least for a while now. You may see some buying support on dips initially, like being witnessed lately, but the precious metal seems to have lost its lustre for now. So if you are a late bloomer who came in seeing the past returns in gold, read the writing on the wall, and carefully.
The writer is senior research
analyst at Morningstar India  |
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