India’s Evergreen Investment Destination – Gold Commodities Examined

  • Posted By : reliancesmartmoney.com
  • Thursday Dec 21, 2017

India’s Evergreen Investment Destination – Gold Commodities Examined

Key Takeaways

  • Examining the drivers for gold demand
  • The changing face of gold as an investment class
  • Gold commodity trading

Drivers of gold demand

Investors around the world turn to gold as a hedge against inflation, India is no different. In the immediate aftermath of the demonetization announcement, no prizes for guessing where hundreds of Indians flocked to, jewellery stores of course.

Retailers kept their shops open well after working hours on November 8th and 9th, 2016 to cash in on the ensuing panic as consumers came in droves to make purchases with the ₹500 and ₹1000 notes they had at home. Of course, now that the dust has settled, those moves have attracted IT scrutiny for both consumers and retailers.

The point we’re coming to is that, the lure of gold for Indians goes well beyond cold calculations. In an economic context, gold has material value (of course) In social contexts, it signifies status and wealth, and in religion and ritual, it expresses the highest form of reverence.

Gold demand is driven by rising incomes and fluctuations in gold price. But these factors do not impact gold demand equally. Income levels are the most significant long-term determinant of consumer gold demand, and holding all else equal, a 1% rise in income boosts gold demand by 1%. That said however, a 1% rise in gold prices, results in a disproportionate 0.5% drop in gold demand.

For all these reasons, Indians have the highest consumption of gold the world over, and by 2020 The World Gold Council estimates Indian gold demand to average 850t to 950t per annum.

The Changing Face of Gold as an Investment Class

The investment markets vary from rural to urban consumers in India, 22k jewellery is largely used for investment in rural India, while in urban India bars and coins are the preferred gold investment vehicle. India is one of the world’s largest bar and coin investment markets, and the Indian Gold Coin issued by the government in late 2015 bears out the need for a trustworthy, transparent form of gold bullion to invest in

However, 2016 with its shock announcement of demonetisation, saw a 2015 to 2016 YoY dampening in gold bar and coin investments by 17%. The Q3 low price levels did boost investments in Gold ETFs though. And the class saw second-highest investment on record since 2013 at 2016 annual levels reaching 532t.

Which brings us to the non-physical gold investments, i.e. Gold Mutual Funds, Gold ETFs and Gold Contracts (commodities)

A Gold Mutual Fund invests in companies engaged in the mining, extraction or processing of gold. These do not require a demat account and are suitable for investors with a high-risk appetite. Investing in Gold ETFs (Exchange Traded Funds) require a demat account. This fund invests in gold held in a dematerialised form. Gold ETFs have several advantages such as liquidity, safety, tax benefits, and being cheaper than buying physical gold.

Gold Commodities

Investing in gold commodities comes in 3 forms

  • Futures market (both delivery and cash transactions)
  • Commodity stocks
  • Commodity based Mutual Funds and Exchange-traded Funds

The value of the gold commodity contract is dependent on the quoted price and is calculated by multiplying the current price by the actual price of the gold commodity contract. Gold commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract.

The popular commodity exchanges in India are National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India (MCX) Overall, more than 40 commodities are traded on nationwide exchanges. Gold comfortably accounts for the largest market share at 43%.

In all, investors aiming at a diversified portfolio would be well-served to invest in gold commodities as a hedge against domestic and global economic upheavals (such as Brexit, U.S elections, etc.), but ideally to a limited extent of 5-10%. 

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