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RETAIL RESEARCH
MUTUAL FUNDS
06 May 2016
Gold ETF - an Update
Prologue: Having yielded close to 21% of calendar to date returns (ended on 4th May 2016 over the last four months period), the yellow metal
has once again come under the limelight supported strongly by the slowdown in the US and other developed economies, weaker dollar and
relatively underperforming stock markets across the globe despite poor demand for gold from the Asian countries such as India and China.
The gold in domestic markets shot up to hit the psychological Rs. 30,000 level while the Gold futures internationally touched more than $1,300
level in the USD terms. The major events in the recent periods such as pausing on rate rise by the Federal Reserve coupled with the Bank of
Japan's stimulus policy have helped the gold prices and boosted the appeal of gold.
YoY performance of Gold:
Interactive gold price chart:
Source: [Link].
Performance of Gold:
Past: After posting an unprecedented 12 straight years positive return till 2012, gold witnessed a tough phase between 2013 to 2015 and
posted muted/negative returns, suffered mainly on the back of US Fed tapering concerns, strengthening dollar, high interest rates, bullishness
in the stock market and huge selling by Gold ETFs internationally. In the domestic front, the gold in INR terms posted lower fall compared to
USD terms all thanks to the sharp depreciation in the rupee value, increase in import duty and growing demand despite the regularity
restrictions.
Present: The recent periods show the prices of gold rising to reach its 15-month highs. The factors which have supported the gold prices
include slowdown in the US and other developed economies, much weaker dollar and relatively underperforming stock markets across the
globe. The pausing on rate rise by the Federal Reserve coupled with the Bank of Japan's stimulus policy have also helped the gold prices.
Future:
A batch of disappointing U.S. economic data, slow approach by the Fed on raising interest rates, weakening dollar, ongoing concerns
about economic growth and financial stability in emerging markets and increased risk-off trade sentiment across the globe,
implementation of negative interest rate territory by the central banks in Europe and Japan, amid higher market uncertainty, etc are
likely to push the gold prices higher in the near term.
As the world moves towards negative interest rates, the key disadvantage of gold (that it has zero yield) vanishes. There is currently
some $7 trillion of government bonds now trading with negative yields. In such a situation, investment in physical gold can
increasingly be justified on a yield basis relative to the highest quality sovereign and (European/Japanese) corporate borrowers.
Physical gold is the only one financial asset which has zero counterparty risk. Even the US Fed is unlikely to raise interest rates by
more than one time in the balance part of 2016.
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Elliot Wave theorists are now joining the many voices that see Gold as an outperformer over the next decade. Market dynamics have
turned positive for precious metals. We now expect higher prices this year because of more monetary policy easing, the Fed
remaining on hold, less upside on the US dollar and an overall improvement in investor sentiment towards precious metals.
Gold seems to be structurally and fundamentally in a sweet spot. For Indian investors gold is also a hedge against weakening of the
Rupee. For any investor, an allocation of between 5-15% of value in gold is advisable. This has to be accumulated over time. There
would be times when this portion of your portfolio will not give any returns, but in other periods, it will give you decent returns and
also hedge your portfolio of equity and bonds which are exposed to global and local vagaries of economy.
Negatives: Any strengthening of the US labour market and positive macro data which may prompt the Fed to hike rates would lead to
a stronger dollar pushing down the prices of gold. Gold is priced in dollars, so often enjoys a burst of investment when the dollar falls
relative to other currencies. When the dollar is strengthening, the gold price drops in dollar terms. The Fed had raised rates for the
first time in a decade in December from near zero but has since stood pat, in part because of global economic uncertainty. Gold is
sensitive to interest rates as rising rates lift the opportunity cost of holding non-yielding bullion.
Performance of Gold ETFs over timeframes:
Scheme Name
AXIS Gold ETF
Birla Sun Life Gold ETF
Canara Robeco Gold ETF
GS Gold BeES
HDFC Gold ETF
ICICI Pru Gold ETF
IDBI Gold ETF
Kotak GOLD ETF
Quantum Gold Fund (G)
R* Shares Gold ETF (Div-Payt)
Religare Invesco Gold ETF
SBI ETF Gold
UTI-Gold ETF
NAV value as on May 05, 2016.
Latest
Corpus (Rs
Crs)
233.88
80.93
83.07
1706.89
606.35
119.59
98.63
491.00
62.16
1378.82
48.54
970.40
471.58
Expense
Ratio(%)
1.09
1.01
1.06
1.00
1.10
1.00
1.25
1.08
0.99
1.14
1.00
0.96
1.07
c YTD
Absolute
19.59
19.54
18.98
19.71
19.52
19.77
19.85
19.69
19.54
18.98
19.65
19.66
19.83
3 Month
Absolute
8.10
8.06
9.11
8.18
8.12
8.29
8.35
8.16
8.01
7.63
8.13
8.14
8.25
Trailing Returns (%)
6 Month
1 Year
Absolute
CAGR
15.47
11.18
15.76
11.29
13.98
10.58
15.64
11.48
15.48
10.97
15.68
11.49
15.71
11.49
15.57
11.22
15.45
11.16
15.04
10.31
15.55
11.28
15.59
11.29
15.72
11.42
3 Year
CAGR
2.33
2.34
1.54
2.47
2.29
2.50
2.43
2.28
2.32
1.99
2.36
2.50
2.36
5 Year
CAGR
5.29
5.38
5.32
5.45
5.35
5.41
5.27
5.44
5.52
5.41
Tracking
Error
(Daily)
0.42
0.42
0.55
0.51
0.41
0.42
0.41
0.41
0.39
0.39
0.42
0.42
0.41
Rationale behind investing in Gold:
Gold is valued and traded in all the countries of the world. Gold is the most liquid asset among all options. It's money without
borders.
An investment portfolio with an allocation to gold improves the consistency of the portfolio making it strong and stable. Gold has
provided consistent appreciation on a continuous basis over the past decade.
Gold has a low correlation with major indices/most other asset classes and hence is a good portfolio diversifier. Ideally Gold should
constitute 5-15% of ones portfolio on a continuing basis.
Gold has been considered as good tactical hedge against inflation.
Gold is used to hedge currency exposure. It has been a part of portfolios since ancient times to guard against economic pitfalls or
disasters.
Gold acts as a safe haven during economic crisis and market downturns. The price of gold is not linked to the performance of an
economy, industry or company. Its appreciation is not affected by market volatility.
Gold prices are normally inversely proportional to the USD. Gold has zero yield, while the USD yields interest. When USD interest
rates go up, the USD strengthens and the attractiveness of gold diminishes. Hence when USD strengthens, Gold price normally
weakens. For holders of USD assets, Gold acts as a natural hedge.
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Rationale behind investing in Gold ETF:
Investors can buy and sell the units of Gold ETF directly on the stock exchange through registered brokers.
Units of Gold ETF are held in the demat form just like equities.
Gold ETFs give an opportunity to investor to invest in standard gold bullion (0.995 purity) without taking physical delivery of gold nor
compromising with its quality.
No entry/exit load. The total expense ratio charged by funds has been a maximum of 1% per annum.
These will not be liable to wealth tax.
A custodian is appointed by the AMC for safe keeping of the gold bought on behalf of the investors.
Gold ETF: Gold ETFs are passively managed mutual fund schemes investing in standard gold bullion having 99.5% purity. They are listed on
the stock exchanges for trading with an intention to offer investors a means of participating in the gold bullion market without the necessity of
taking physical delivery of gold. These are designed to provide returns that closely correspond to the returns provided by domestic price of
Gold.
Advantages of Gold ETF:
ETFs have more advantages compared to actively managed funds. They are as follows;
Small denomination: Retail investors, who want exposure to gold in small amounts, can opt for Gold ETFs. It allows investors to buy
one unit, which is buying 0.5 - 1 gram of gold depending on the scheme.
Liquidity: Gold ETFs are can be bought and sold any time during the trading hours like equities at the price quoted on the exchange.
This makes it a liquid investment instrument.
Transparent Pricing: The price of ETFs is quoted on the stock exchange and there is a bid/ask during market hours enabling you to
buy/sell at market prices. Thus you do not have to pay a premium while you purchase or a sell at a discount as in the case of jewellery
or even sometimes in coins and bars.
Safety: Gold ETFs is essentially buying gold in paper form. So the investor does not have to take the trouble of safe keeping of the
gold. The custodian appointed by the AMC has the responsibility of taking care of the gold.
Purity: Mutual funds are governed by SEBI and SEBI regulations require the purity of underlying gold in Gold ETFs to be 99.5% fineness
and above. This spares investors the trouble of finding a reliable source to buy gold.
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HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022)
2496 5066 Website: [Link] Email: hdfcsecretailresearch@[Link]. HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475."
Disclaimer: Mutual Funds investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the
recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information
contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell
securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients.
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may
not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.
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