 "Don't buy gold on Akshaya Tritiya")
This year, clients of Bengaluru-based financial planner Anil Rego have not yet asked him for advice on whether they should buy gold on Akshaya Tritiya. Given Indians' general love for gold, this lack of interest might seem surprising as the festival, on the coming Tuesday, is considered an auspicious occasion to buy gold. Or, maybe not, given how returns from gold have fallen over the past couple of years.
"Gold should be part of your asset allocation. While equities will always do better than gold in the long run, having gold along with equities will reduce the risk in your portfolio and improve the returns," Rego says.
Naveen Mathur, associate director, commodities & currencies, Angel Broking, also recommends having gold as part of your investment portfolio at all times. "Investors should have 10-15 per cent of their portfolio in gold at all times because it is a risk-averse commodity. If equities do badly, gold does well," he says.
Wrong time
However, for those looking to earn from gold, this is a wrong time. "All the fundamental factors are negative. For instance, the dollar might gain, as the US Federal Reserve is likely to start raising interest rates. The euro economies are also expected to do well. If global economies do well, risk assets like equities will do well, rather than risk-averse commodities like gold. I don't see much upside for gold prices," says Mathur.
After the run-up in gold prices between 2003 and 2012, further correction is possible, says Viral Shah, senior vice-president at Geofin Comtrade. Hence, it is not the best asset class at the moment.
"Domestic gold prices might go up due to short-term demand on account of the wedding season. But there could be depreciation in prices close to September. Hence, those looking to buy should stagger their purchases," he says. Prices in India are already at a disparity because of the duty structure. If the duty is reduced, domestic gold prices could fall to Rs 23,000-24,000 per 10g.
Rajshri Nambiar, chief executive officer, India Infoline Finance, also agrees a sharp rise in gold prices looks unlikely. Yet, over three to five years, it could be a good investment opportunity. "Don't expect a big run-up in prices in the short term. But, it is a reliable asset in the long term. We expect prices to rise by 10 per cent by end-2015," she says.
An increase of five to 10 per cent is the maximum that investors can expect from gold this year
The other advantage of gold, as a hedge against inflation, also seems to be waning. "Crude oil does not look like it will move beyond $50-60 (a barrel) in the international markets. So, inflation across the globe does not seem too high. In that case, gold will no longer be useful as a hedge against inflation," says Mathur.
For portfolio purposes, investment in gold should be done systematically, through gold savings funds or exchange traded funds (ETFs). "You will have to pay higher fund management charges for gold savings funds; with ETFs, you will have to pay brokerage charges. With ETFs, it might not very easy to do systematic investment, which is easier in gold funds," says Rego.
If you want to buy physical gold, it is better to buy coins instead of jewellery, as transaction costs are higher with the latter. In fact, the physical gold that most Indian households hold would be sufficient to take care of the portfolio requirements and there might be no real need to buy additional gold, says Mathur.
Use for leverage
One reason retail investors prefer gold is because it is easy to leverage. Today, loans against gold are easily available from banks, non-banking finance companies (NBFCs) and the unorganised sector, like money lenders. While banks charge around 12 per cent, NBFCs charge between 12 and 22 per cent and money lenders charge 30-40 per cent. "Only 10 per cent of the gold held by households is monetised today by taking gold loans," says Nambiar.
Opacity in gold saving
The gold savings schemes offered by jewellers took a hit after these were brought under the Companies Act, last year. This put a restriction that the effective return on these could not exceed 12 per cent and the tenure should not be more than a year. Until then, the effective returns on these used to be around 19 per cent for three years, 12 per cent for two years and eight per cent for a year.
Some jewellers have re-launched these schemes after restructuring. Yet, they continue to be opaque, although they are a good way of accumulating gold, say experts.
Under Tanishq's new Golden Harvest scheme, you can pay a fixed amount every month for 10 months. From the end of the 10th month on, you will get a discount between 55 and 75 per cent of the fixed instalment, depending on maturity date. The deposit can mature in the 11th, 12th or 13th month. For a shorter-term deposit that matures in the seventh month, the discount is 20 per cent. The deposit has to be mandatorily closed within 390 days of opening the account.
Sandeep Kulhalli, senior vice-president at Tanishq's jewellery division, says the advantage of such schemes is that they allow customers to plan for purchases through their savings; the returns are incidental. "Returns falling from 15 to 12 per cent is not much. Otherwise, customers will need huge amounts of money to buy jewellery," he says.
However, financial planners say these schemes are not very beneficial if you are not getting any additional return other than gold. "You should ask what is the value these schemes offer. Keep in mind that you can redeem the deposit only against jewellery, which has making charges. It will make sense only if you have a need for jewellery," says Anil Rego.
Gold monetisation
The finance minister announced a gold monetisation scheme in Union Budget 2015-16, aimed at the large idle stocks. The scheme will allow depositors to earn interest in their metal accounts. The guidelines are expected by next month. It will replace the present gold deposit and gold metal loan schemes.
The scheme will allow individuals to deposit their gold with banks and earn an interest on it, calculated on the value of gold. The government will lend this gold to jewellers. This is hoped to reduce the country's dependence on imported gold.
The current interest rates offered by State Bank of India on its gold deposit scheme are 0.75 per cent for three years and one per cent for four years and five years. At the end of the maturity period, depositors will get their gold back or the rupee equivalent at the prevailing price plus the interest.
"Success will depend on the rate of interest and how the gold can be resold," says Shah of Geofin. Experts say the scheme will not be attractive unless the spread is at least three per cent.
Another disadvantage of the current scheme is that the minimum gold depositors can keep with banks is 500g, a lot for a household. Unless this is reduced, people might not be ready to deposit it with banks, say experts.
"Gold should be part of your asset allocation. While equities will always do better than gold in the long run, having gold along with equities will reduce the risk in your portfolio and improve the returns," Rego says.
Naveen Mathur, associate director, commodities & currencies, Angel Broking, also recommends having gold as part of your investment portfolio at all times. "Investors should have 10-15 per cent of their portfolio in gold at all times because it is a risk-averse commodity. If equities do badly, gold does well," he says.
Wrong time
However, for those looking to earn from gold, this is a wrong time. "All the fundamental factors are negative. For instance, the dollar might gain, as the US Federal Reserve is likely to start raising interest rates. The euro economies are also expected to do well. If global economies do well, risk assets like equities will do well, rather than risk-averse commodities like gold. I don't see much upside for gold prices," says Mathur.
After the run-up in gold prices between 2003 and 2012, further correction is possible, says Viral Shah, senior vice-president at Geofin Comtrade. Hence, it is not the best asset class at the moment.
"Domestic gold prices might go up due to short-term demand on account of the wedding season. But there could be depreciation in prices close to September. Hence, those looking to buy should stagger their purchases," he says. Prices in India are already at a disparity because of the duty structure. If the duty is reduced, domestic gold prices could fall to Rs 23,000-24,000 per 10g.
Rajshri Nambiar, chief executive officer, India Infoline Finance, also agrees a sharp rise in gold prices looks unlikely. Yet, over three to five years, it could be a good investment opportunity. "Don't expect a big run-up in prices in the short term. But, it is a reliable asset in the long term. We expect prices to rise by 10 per cent by end-2015," she says.
An increase of five to 10 per cent is the maximum that investors can expect from gold this year
The other advantage of gold, as a hedge against inflation, also seems to be waning. "Crude oil does not look like it will move beyond $50-60 (a barrel) in the international markets. So, inflation across the globe does not seem too high. In that case, gold will no longer be useful as a hedge against inflation," says Mathur.
For portfolio purposes, investment in gold should be done systematically, through gold savings funds or exchange traded funds (ETFs). "You will have to pay higher fund management charges for gold savings funds; with ETFs, you will have to pay brokerage charges. With ETFs, it might not very easy to do systematic investment, which is easier in gold funds," says Rego.
If you want to buy physical gold, it is better to buy coins instead of jewellery, as transaction costs are higher with the latter. In fact, the physical gold that most Indian households hold would be sufficient to take care of the portfolio requirements and there might be no real need to buy additional gold, says Mathur.
Use for leverage
One reason retail investors prefer gold is because it is easy to leverage. Today, loans against gold are easily available from banks, non-banking finance companies (NBFCs) and the unorganised sector, like money lenders. While banks charge around 12 per cent, NBFCs charge between 12 and 22 per cent and money lenders charge 30-40 per cent. "Only 10 per cent of the gold held by households is monetised today by taking gold loans," says Nambiar.
Opacity in gold saving
The gold savings schemes offered by jewellers took a hit after these were brought under the Companies Act, last year. This put a restriction that the effective return on these could not exceed 12 per cent and the tenure should not be more than a year. Until then, the effective returns on these used to be around 19 per cent for three years, 12 per cent for two years and eight per cent for a year.
Some jewellers have re-launched these schemes after restructuring. Yet, they continue to be opaque, although they are a good way of accumulating gold, say experts.
Under Tanishq's new Golden Harvest scheme, you can pay a fixed amount every month for 10 months. From the end of the 10th month on, you will get a discount between 55 and 75 per cent of the fixed instalment, depending on maturity date. The deposit can mature in the 11th, 12th or 13th month. For a shorter-term deposit that matures in the seventh month, the discount is 20 per cent. The deposit has to be mandatorily closed within 390 days of opening the account.
Sandeep Kulhalli, senior vice-president at Tanishq's jewellery division, says the advantage of such schemes is that they allow customers to plan for purchases through their savings; the returns are incidental. "Returns falling from 15 to 12 per cent is not much. Otherwise, customers will need huge amounts of money to buy jewellery," he says.
However, financial planners say these schemes are not very beneficial if you are not getting any additional return other than gold. "You should ask what is the value these schemes offer. Keep in mind that you can redeem the deposit only against jewellery, which has making charges. It will make sense only if you have a need for jewellery," says Anil Rego.
Gold monetisation
The finance minister announced a gold monetisation scheme in Union Budget 2015-16, aimed at the large idle stocks. The scheme will allow depositors to earn interest in their metal accounts. The guidelines are expected by next month. It will replace the present gold deposit and gold metal loan schemes.
The scheme will allow individuals to deposit their gold with banks and earn an interest on it, calculated on the value of gold. The government will lend this gold to jewellers. This is hoped to reduce the country's dependence on imported gold.
The current interest rates offered by State Bank of India on its gold deposit scheme are 0.75 per cent for three years and one per cent for four years and five years. At the end of the maturity period, depositors will get their gold back or the rupee equivalent at the prevailing price plus the interest.
"Success will depend on the rate of interest and how the gold can be resold," says Shah of Geofin. Experts say the scheme will not be attractive unless the spread is at least three per cent.
Another disadvantage of the current scheme is that the minimum gold depositors can keep with banks is 500g, a lot for a household. Unless this is reduced, people might not be ready to deposit it with banks, say experts.