Diversification Into Gold

Diversification into Gold
Trufid

Diversification Into Gold

Case For Diversification into Gold as an Asset Class
1. Background

1. International prices of gold.

2. USD INR fluctuation (depreciation or the rupee. makes gold more attractive)

3. Custom Duties and other taxes.

2. International Price of Gold
International Price of Gold

The above chart provides the USD Prices of gold over the last 25 years. One can see gold recorded a significant jump post the 2008 crisis and peaked by 2012 as the crisis eased.

Subsequently we saw a very flat movement of gold prices till 2020.

Currently, we are seeing an uptrend given the uncertainty from the corvid crisis.

One of the key factors for the movement is also linked to the debasement of currency which primarily means that most central banks are in the process of increasing the currency to stabilize their economies.

While initially it provides the required support to the system over time as economic activity picks up most prices start readjusting to factor in the easy money in the system. Hence, investors resort to using gold in their portfolios to provide a hedge to the money debasement risks.

3. Currency USD INR Pair
Currency USD INR Pair
The other component to gold prices is the fluctuations on the rupee. The above chart provides a view onto prices for last 25 years on INR. As one can see barring for a period between 2003 to 2008 Indian rupee has consistently depreciated against the USD. This provides tailwinds to the local prices of gold.

4. Mediums to own gold as a financial investment

Enclosed below is a table providing the medium through which gold can be owned as a financial investment in India
Details
Physical Gold
ETF
SGB
Gold Deposit Scheme
Quality
0.999 biscuits
0.995
0.999
0.995
Source
Bullion Dealer
-
India bullion association price
-
Expense Ratio
Storage & Insurance costs
0.55% p.a
Nil
Nil
Min
100 gm/1kg
1/10 gm
1 gm
30 Gm
Max
No limit
No limit
4KG cumulative purchase in a year
No limit
Tenure
-
-
8 Years with option to exit on 5th 6th and 7th year
-
Interest Rates
NA
NA
2.50% semi annual
As below
Interest Rates
NA
NA
2.50% semi annual
As below
0-1 Year
-
-
-
0.50%
0-1 Year
-
-
-
0.55%
2-3 Year
-
-
-
0.60%
5-7 Years
-
-
-
2.25%
12- 15 Years
-
-
-
2.50%
Premature Withdrawal
Sale
Market Sale/ Redemption for creation units
Market Sale
Yes after one year with penalty of lower interest rate
Withdrawal in Gold
NA
Yes for creation unit
No
Yes
Cap Gains
Less than 3 Years
Short Term
Short Term
Short Term
NA
More than 3 Years
Long Term
Long Term
Long Term
NA
Indexation for long term
Yes
Yes
Yes
NA
At Maturity
-
-
Taxfree
NA
5. Recommended route and performance of Gold ETF

Given that holding physical gold is cumbersome and SGB has a long holding period the ETF becomes the preferred route to hold gold as a financial investment.

Performance of Gold ETF in %

Performance Gold EFT
Conclusion:
While gold is a volatile asset class and gold prices have had a good run, there is a case for inclusion of gold in portfolios primarily to provide a hedge to financial investments. The declining economic scenario combined with individual countries reliance on central banks to help finance their deficits will have positive impacts on gold prices any recovery will cause some level of corrections in prices. However, on an overall basis this helps hedge the financial portfolios with some non -corelated asset class.

Disclaimer

This publication has been issued by Trufid Wealth Management Private Limited for the information of its customers only.

This publication does not constitute investment advice or an offer to sell, or a solicitation of an offer to purchase or subscribe to any investment.

The information here in is derived from publicly available sources that Trufid considers reliable but which has not been independently verified.

Whilst every care has been taken in compiling the information, Trufid makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.

Expressions of opinion are those of Trufid only and are subject to change without notice.

Opinions expressed herein do not have any regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this publication.

Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed in this publication and should understand that the views regarding future prospects may or may not be realized.

The information contained herein is confidential to the recipients thereof and may not be reproduced or otherwise disseminated.

Trufid or its officers, directors, or employees may have investments in any of the products such in this publication (or in any related products) and from time to time may add or dispose off any investment.

For private circulation only. The information contained herein is confidential to the recipients thereof and may not be reproduced or otherwise disseminated.

Leave a Reply

Your email address will not be published. Required fields are marked *