This Dhanteras - 2014

Invest in GOLD

Invest in GOLD

This Dhanteras Invest in GOLD

GOLD, the alluring precious metal, has enticed communities around the world
for ages and centuries. But Indians share a special kind of relationship with the
yellow metal.

DhanTeras , a revered day for the Indian community is an auspicious

occasion to pay tribute to the goddess of wealth, 'Lakshmi'. Over the years,
Indians have found a respite in various investment opportunities for wealth
creation. But 'Everything that glitters is not gold'. Indians have been proverbial
followers of the proverb 'old is gold' and have always valued their relationship
with Gold. India consumes approximately one fourth of the total gold
consumption every year.
Apart from jewellery, various kinds and forms of gold has attracted people
from various levels of the society. Cultural and ritual diversity as well as
nostalgic affinity have continued to dominate Indians with the desire for
owning Gold even during the period of economic downturn.

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Invest in GOLD
Usage of Gold
Traditionally, Gold has been used as a medium of exchange and for making jewellery & ornaments. Over
the period, however, Gold has evolved from being a mere precious metal to having multiple usages
across various industries. Gold is malleable & ductile of all assets and has high resistance to corrosion.
The invention in modern science & technology has further increased the industry usage of Gold.
According to World Gold Council (WGC), till date there are 177,200 Mt of gold in circulation. Of this
quantity, nearly half is used for Jewellery followed by investment, holding by central banks, Industrial
application and rest others.
Gold in circulation and its application

Demand Flow 5 year average (2008-2013)

Segment

Qty (Mt)

Jewellery

86,828

49

Investment

35,440

20

Technology and Industrial Use

21,264

12

Central Banks

30,124

17

Unaccounted

3,544

177,200

100

Total

Segment

Qty

1,410.50

34

427.8

10

1,983.30

48

Central Banks

282.6

Total

4,104

100

Investment
Technology and Industrial Use
Jewellery

Source: WGC, SSL Research

Source: WGC, SSL Research

Jewellery: Gold is highly used to make ornaments and jeweler. Infact, most of the gold that is newly
mined or recycled is used in the making of Jewellery. In East Asia, India and the Middle East, gold has
powerful cultural meaning, accounting for approximately 70% of the world's gold jewellery in 2013.
As per WGC, on an average since last 5 years (2008-2012), 49% of gold demand goes for making
jewelley.
Central Banks: Now a day's central banks are also account for major demand components. In last
5 years central banks share have around 7%.
Investment demand: This has been fueling the overall demand for gold. The investment demand which
includes Physical Bars, Coins and ETF's have gone up to 34% in last 5 years from 20% when compared
with total gold under circulation. ETFs account for nearly 1% total gold under circulation. The total asset
under management (AUM) in gold ETF's has increased from USD ~600 million in 2003 to ~USD132 billion
at present.
Other Usage : Dental, Medical, Glassmaking, Aerospace & Other industrial usage

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Invest in GOLD
Demand, Supply, Production & Consumption
World Gold Demand

World Gold Supply

World Gold Supply (MT)

World Gold Demand (MT)

Demand
5000
4000

Sup ply

Y-o -Y Growth (%)

3725 3601

4159

4589 4416 4066

30

Y-o-Y Growth (%)

5000
4034

20

3082 3110

3000
2052

4000

4354

4515 4 453

4340

3451 3471 3513

20
10

3000
10

0
2000

2000
0

1000
0

(10)

(10 )

1000
0

2006 2007 2008 2009 2010 2 011 2012 2013 1H14

(20 )
2006

2007 200 8 2009

2010

2011 2 012 2013

World Demand for gold has risen at ~4.0% CAGR

between 2006 and 2013. In 2008 it witnessed a
stupendous growth of ~ 20% with the world economy
being grappled in recession. In the years 2010 and
2011, demand surged again by 15% and 10% respectively
with increasing volatilities in the global economy, while
in the year 2013 the demand dropped by 8%.

The world gold supply has grown at a CAGR of 3.3%

from 2006 to 2013 and has not been able to match the
demand growth which has led to increase in price of
gold.

World Gold Production

India Gold Consumption Trends

Indian Gold Consumption (MT)

World Gold Production (MT)

Production

Con sump tion

Y-o-Y Gro wth (%)

Y-o-Y Growth (%)

80

3000
2800

2660 2690
2560

2600
2400

2770

24 60
2370 2350

2280

2200
2000
2006 2007

2008

20 09 2010

10.0
8.0
6.0
4.0
2.0
(2.0)
(4.0)
(6.0)

2011 201 2 2013

World gold production grew at a CAGR of 2.3% from

2006 to 2013 which did not match the demand growth
of 4.0% for the same time period. Production declined
from 2006 to 2008 but since 2009 the growth has
gathered some momentum.

1167

1250
963
900

722

769

975
50
864

713

20
579

550

(10)

200

(40)
2006 2007

2008

2009 2010

2011 20 12 2013

India accounts for nearly a quarter of the world gold

demand. It is also world's largest single consumer of
gold. Indian households hold 25,000 tonnes of gold
which represents 14% of the global stock. The year
2010 witnessed largest surge of 66% in gold consumption
followed by the year 2011 during which it rose by 21%.
But in the year 2013 consumption saw an increase of
13%.
Source: WGC, SSL Research

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Invest in GOLD
Performance of Gold as an Asset Class
Performance of Gold vis-a-vis other Indices (%)
1 Year

2 Years

3 Years

5 Years

40.00
30.00
20.00
10.00
0.00
-10.00

CNX Commodities

DAX

Dow Jones
Composite Index

Hang Seng

MCX GOLD SPOT S&P BSE SENSEX

-20.00
Source: AceMF, SSL MF Research / Note: Simple Annualized Returns as on October 13, 2013

Gold in rupee term has underperformed all the major indices in the world for 1 and 2 year time frame primarily
because of dollar strengthening and rise in risk appetite towards equity. However, in terms of dollar the decline
is much more severe (>7%). We believe the further slide in Gold prices remains unlikely due to rising cost of mining
as the average mining cost is above USD 1000/oz. In rupee terms the premium pricing is primarily because of
higher import duty and depreciation of rupee against dollars in last 2 years.

Y-o-Y (Dhanteras to Dhanteras) Returns on Gold (%)

2013-14

-0.64

2012-13

0 .60

2011-12

18

2010-11

36

2009-10

24

2008-09

33

2007-08

11

2006-07

22
-5

10

15

20

25

30

35

40

Source: AceMF, SSL MF Research Note: Simple Annualized Returns (on MCX Gold Spot) as on October 14, 2014
Closing prices of Dhanteras dates considered for each year.

Dhanteras which is considered to be one of the most auspicious occasions for buying gold has also proved to be
one of the best times to rake in decent returns from Gold. The above graph clearly shows that how buying Gold
on every Dhanteras has benefited investors except for past two years when government initiated various policies
to curb Gold imports
Gold has outperformed all the major indices in the world by giving annualized average yearly returns of 15.7%
for 5 year time frame and 18.5% for 3 year time frame.
We believe gold can be used as a diversification tool to cushion against volatile return from other asset classes.
An investor may allocate 10-15% of their financial investment in Gold.

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Invest in GOLD
Factors Affecting Prices of Gold
The Economics of Demand and Supply
Tremendous demand for Jewellery consuming 2/3rd of annual gold production
Continuous demand from India and China
Short run supply constraints due to Gold miner's strikes, etc

Policies of Central Banks

Central Banks hold large amount of Gold reserves
Thus, have potential to impact prices with large demand & supplies

Hedging, Investing & Speculation

The most important usage of Gold is an Hedge against Inflation
Many consider Gold as an investment option to meet their long term needs
Gifts in form of Gold are considered as tradition and wise options
Speculators choose futures and options to benefit from rise & fall in gold rates

State of Economy
In an economy with either Slow growth or high inflation or both Gold is considered as the only
of the few options to invest
It is also considered as a 'Safe Heaven' by many
The higher the risk aversion in equity markets, the higher the investment sentiment towards
Gold investment.

Gold Products
Financial Innovations has lead to new products for Investment in Gold
Gold futures, options, ETFs, Gold Funds or Investing in Gold mining Companies has seen a
surge in recent years
Globally, demand for ETFs has increased. Typically, funds are required to maintain the value
of ETFs sold in the form of physical gold, driving up overall demand.

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Invest in GOLD
Modes of Investing in GOLD for Retailers
Bars
Gold bars come in various sizes: 50 grams, 100 grams, 1 kg, 1 ounce, 10 ounces, 100 ounces
and 400 ounces, etc.
Bullion banks like Nova Scotia import the bars and sell them in the Indian market.

Coins
Coins are considered auspicious and an excellent form of investment
These coins are also available with images of Ganesha, Laxmi, Balaji, Saibaba, Allah, Om,
Ayyappa, Cross and any other motifs.

Jewellery
As per the recent report by Indian Bureau of Mines, Jewellery accounted for major consumption
of gold of around 85% of the total consumption.
According to World Gold Council, India's estmated demand for the year 2013-14 is 1,000 Mt.
of which 50% is for Jewellery segment.

Gold ETFs
Also known as paper gold, Gold ETF is an open ended mutual fund which invests in gold with
99.5% purity and trade on stock exchanges just like shares.
As per AMFI, the AUM of Gold ETFs have clocked 34% Y-o-Y to Rs. 14,700 Cr as on October,
2013.
Can be purchased through SIP, no risk of storing.
No sales tax, Wealth Tax, VAT or securities transaction tax is applicable.

Gold Savings Funds

Gold Savings Funds are fund of funds (FoF) that invest in gold ETFs.
No need to open a demat account and trading account & SIP is possible. However, double
charges (of Gold Fund as well as ETF) are a drawback.

Gold Derivatives
Derivatives such as Gold Futures, Forwards, and Options are available and traded around the
world as well as on OTC markets
Use of Margins help in leveraging the investment in Gold Futures.

Gold Mining Companies

Here, investors buy stocks of Companies in the business of Gold mines.
Mutual Funds in India like, DSP BlackRock World Gold Fund and Pine Bridge (formally AIG)
World Gold Fund invest in stocks of gold mining companies across the globe.

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Invest in GOLD
Outlook and Recommendation
Although, world economies have shown signs of growth, they are still not completely out of woods. The
growth concern still persists with Euro-zone, US and other developed countries as the recent growth
revival was primarily driven by expansionary monetary policies. We also believe that global liquidity
inflow will remain robust. Moreover, the rising risk aversion towards other asset classes is expected to
support gold prices. We also expect the US Fed to continue its low interest rate till start of next year
before growth and employment picks up.
The Gold mining industry is in consolidation phase with a spike in the number of producers reducing
output or even shutting down operations as Gold price has tumbled down to around USD 1200/oz.
Several mines globally have already suspended output in the past 18 months, as mining costs hover
around USD 1000/oz and it makes miners unprofitable to sell gold at such low prices. This would
ultimately support Gold prices in long run due to supply constraints.
Hence in medium to long term, we are positive on gold prices. We recommend following Gold ETF's for
this Dhanteras.

Our Recommendation
Gold ETF

NSE Symbol

BSE Code

1.

SBI Gold ETF

SBIGETS

590098

2.

Reliance Share Gold ETF

RELGOLD

533891

3.

Goldman Sachs Gold BeEs

GOLDBEES

590095
Risk Return (%)

Scheme Name

Nav as on
13.10.2014

Corpus
(Cr.)

Absolute
3 Mths 6 Mths

CAGR
1 Yr

2Yrs

3Yrs

5Yrs

SBI Gold ETF

2,494.20

1,926.99

-6.44

-5.46

-5.87

-8.33

-0.94

9.63

R Shares Gold ETF

2,475.32

1,656.36

-5.14

-7.15

-4.64

-7.67

-0.45

10.08

GS Gold BeES

2,564.70

1,051.06

-6.46

-5.47

-5.7

-8.19

-0.79

9.78

Source: AceMF, SSL Research

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Invest in GOLD
Name
Alpesh Porwal
Rajesh Gupta
Ankit Gor
Mandar Dhavle
Vaibhav Joshi

Designation
SVP & Head (Retail)
Research Analyst
Research Analyst
Research Analyst
Research Associate

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