Gold An Investment Opportunity CA Bhargava N. Vaidya 22 nd December 2011 J.S. LODHA Auditorium, ICAI
WHAT IS GOLD COMMODITY OR CURRENCY?
ROLE OF GOLD Hedge against Inflation Store of Value Liquidity / Diversification of portfolio
GOLD PHYSICAL AN ASSET WHICH IS NO ONE S LIABILITY
HISTORY Gold Currency (1890-1913) Gold Standard (1925-1931) 1968 Split in European Gold Market Bretton Wood (1944 1973 ) Fixed exchange rate collapsed in 1973
LONDON 19 th Century: Great Britain first country to adopt the full Gold standard. 1919 : Formation of the London Gold Fixing Up to 1968: No Competition in London Gold Market After 1968 : London s Monopoly ends after temporary closure of Gold Market. 1987 : The LBMA Incorporated as on 14/12/87
USA 1792 : US assigned a formal monetary role Currency Backing with AU and AG 1848 : Large Gold discovery in California, North America became the worlds major supplier 1944 : Bretton Woods agreement tied gold to the US $ 1971 : President Nixon ended the convertibility of the US $ into gold 1974 : Lifting the ban of Gold Ownership 31.12.74: Gold futures opened for trading on COMEX (today a subdivision of NYMEX) 1982 : COMEX started operating a market in Gold options
DRIVING FACTORS Sovereign Debt crisis Geo Political Factors Currency Factors Surplus Funds from Oil producing Countries / Hedge Funds Official Sector (Central Bank / IMF) Mining Industry
Official sector holdings as on 2010 COUNTRY TONNES USA 8,134 Germany 3,401 IMF 2,814 Italy 2,452 France 2,435 China 1,054 Switzerland 1,040 Russia 789 Japan 765 Netherlands 612 TOTAL 23,496
Gold Hedging Environment 1980 s 2000 s Gold Loans small to medium cost mines Spot deferred, Fixed and Flat forwards Less Gold Loans Larger more mature mines Structured Options Producers De Hedging by 2005
GOLD PRICE Turn of previous century around $ 20 1934-1968 Fixed at $ 35 1979 1982 Bull Market Years on 21 /1/1980 $ 855 Average Price 1980 $ 614 Average Price 1990 $ 383 Average Price 2000 $ 279
IMPORTANT HIGHLIGHTS May 99 : : BOE decides to halve its Gold reserves September 99 : Washington Agreement May 2000 : SNB begins sale of Gold from its reserves. 2003 : Central Bank Gold agreement 2009 : Renewed Central Bank agreement
GOLD PRICE Average Price 2001 $ 271 Average Price 2003 $ 363 Average Price 2004 $ 409 Average Price 2006 $ 604 Average Price 2009 $ 972 Average Price 2010 $ 1225 Average Price up to Nov 2011 $ 1561
SILVER PRICE Average Price Till 1972 around $ 1.5 January 1980 (High) $ 49.45 Average Price 2000 $ 4.95 Average Price 2005 $ 7.31 Average Price 2009 $ 14.65 Average Price 2010 $ 20.16 Average Price up to Nov 2011 $ 35.54
IMPORTANCE of GOLD - INDIA Largest item in portfolio (Rs.65,00,000+ Crores) Major forex asset ($ 1240+ Billion) Liquidity Legend (Gold & age)
HISTORY Net Gold Surplus for years 1962 - Gold Control Act. Development 1990 Abolition of Gold Control Act 1992 NRI Imports 1994 SIL Import 1997 Authorised agencies / Banks 2003 -- Future/Forward trading in bullion 2007 -- GOLD ETF In India
SIZE OF MARKET LBMA daily clearing volume : 665+ tonnes Annual Indian market :1000+ tonnes SPDR ETFs quantity :1,250+ tonnes Major International ETFs :2,150+ tonnes All Indian ETFs quantity : 21+ tonnes. Folio 350,000+
Expectation From Investments Safety Liquidity Returns Tax Friendly
TRADITIONAL PRODUCTS Gold Bars and Coins Gold in demat form Gold Accumulation Plan / Gold Deposits -- Regulated -- Traditional
TRADITIONAL GAP Jewellers collect some amount every month and credits your account with Gold in gms. (rate???) Some Interest is paid at end of the period e.g. 24 installments = 24 +2 Credit Risk?? Many time redeemed only with their jewellery.
GOLD DEPOSIT With Jewellers / Small Corporate Gold is deposited credited in gms returned with some interest generally in gms Credit Risk??? Mirrored By RBI earlier and By banks like SBI as on today
Bank Gold Deposit Scheme Current interest rates 0.75% p.a. for 3yrs and 1% p.a. for above Minimum period of deposit 3yrs and maximum 5 yrs. Gold i.e. Gold bars, Coins, Jewellery etc. will be accepted in scrap form only. Easily transferable Rupee loans available up to 75% of the notional value of gold. Exemptions from Income Tax, Wealth Tax and Capital Gains Tax available.
MODERN PRODUCTS Structured Notes Capital Protected Notes Gold Debentures Gold ETF
Gold ETF: Key Benefits ETFs are backed by high quality physical gold and gold is safely stored in highly secure vaults Gold ETF units are held in demat form, can be accumulated in small lots Purchase and sell of ETFs on the exchange like a share No wealth tax and Securities transaction tax, VAT chain is not broken Also LTCG benefit available after one year.
PAPER GOLD PRODUCTS Gold Debenture : promise to return gold at end plus a specific interest amount. Can be en- cashed in rupees Structured Products : Present but difficult to create as option not available in Indian market
GOLD MINING SHARES Geared returns Increase % Gold Price 1200 1500 25 % Mining Cost 1000 1000 Profit 200 500 150 % Shares of Gold mining Company will give higher Return when Gold in on a Bull run
GOLD FUTURES Highly Geared Product Good for professional Under Indian Conditions delivery Banks / Mutual Funds etc can not participate. (In India)
REGULATORS Forward Market Commission SEBI If collective saving scheme RBI for banks and NBFC products
GOLD DEMAND 2009 2010 2011 (upto Q3) 2011F Fabrication 2,223.3 2,483.2 1,872.2 2,496.3 Total Bar and Coin demand 776.1 1,149.5 1,088.4 1,451.2 ETFs and similar 617.1 367.7 67.3 89.7 OTC investment and stock flows 464.4 151.1-83.4-111.2 TOTAL DEMAND 4,080.9 4,151.5 2,944.5 3,926.0 Source : WGC / GFMS
GOLD SUPPLY 2009 2010 2011 (upto Q3) 2011 F Mine Production 2,589.1 2,685.8 2,086.6 2,782.1 Net Producer hedging -236.4-108.4 21.9 29.2 Total Mine Supply 2,352.7 2,577.4 2,108.5 2,811.3 Official sector sales 33.6-77.0-348.7-464.9 Recycled Gold 1,694.6 1,651.1 1,184.7 1,579.6 TOTAL SUPPLY 4,080.9 4,151.5 2,944.5 3, 926.0 Source : WGC / GFMS
Price Outlook - Positives Good scope for growth in investment demand, driven by loose monetary policy, growing inflation concerns and ongoing sovereign debt crisis. Growing buy-side interest from official sector in developing countries. Price floor for gold has risen, with mid to high $1,500s prices likely to see more fabrication demand, strong bar hoarding and less scrap supply. Real money managers commitment, e.g. pension funds, still very low. For example, only 0.15% of total US pension fund assets are believed to be in gold.
Price Outlook - Negatives Fabrication demand remains low. Scrap supply can increase. There will be response to major increases in local prices. De-hedging will fall sharply to trivial levels. Market surplus (mine production + scrap less fabrication demand) forecast to rise
THANK YOU B. N. VAIDYA & ASSOCIATES