Yes, the increasing price of gold continues to attract many buyers and investors. But did you know that gold has in fact gained just 8.9% on a compounded annual basis since 1991? And don’t be foolish to believe that the price will continue to rise always
IDBI Mutual Fund has announced the launch of a gold ETF fund, the latest to enter this segment after a series of ETFs launched recently by HDFC, ICICI and Birla Sun Life mutual funds.
IDBI Gold ETF is an open-ended gold exchange traded fund, like any other gold ETF, and there is nothing novel or different about it from the already existing gold ETFs.
A gold ETF is a paper asset designed to track the gold price without holding physical gold. But is gold a good asset to buy today? Nobody really knows. The price of the yellow metal has already jumped about six times over the past ten years, from $250 to around $1,500 and it may continue to rise or go down, depending on which way interest rates go.
Jumping into any asset that has already increased in value many times over does not make any sense, irrespective of the fact that it could head further up. The best investments are those that are available at a low price, are not very hot, and have started an uptrend, and not when they are already hot and you consider investing in anticipation that it would rise further.
Indians believe that the price of gold (as that of real estate) is always increasing. This is true. But let that not lead to blind belief. If you don't know by how much the price of gold has gone up over the past 20 years, or why, it would be blind to believe that it is going to continue to go up endlessly. It is a common belief that gold offers good returns over the long term. Again, not true. Since 1991, gold is up just 8.9% on a compounded annual basis. That hardly beats a recurring deposit scheme!
Gold is not an investment, but a speculative asset, influenced mainly by the dollar and US interest rates. If you invest in gold, you cannot be passive about it, expecting a rise year after year. Gold does well only in certain market conditions, that is, when real interest in the US is negative to zero. This has been the situation for a decade now and nobody knows how long it will continue. If it does, gold will rise further.
There are only speculative forces pushing up the price of gold, something that is beyond the grasp of an average saver. And I this is so, there is simply no logic in investing in gold. Of course, there is speculative merit aplenty, as long as you know when to pass it on to the next sucker.
The IDBI ETF will invest 95% to 100% of assets in gold and gold-related instruments with a medium-risk profile. On the other side, it would allocate up to 5% of assets in debt and money market instruments with low- to medium-risk profile.
The new fund offer price is Rs100 for cash at a premium equivalent to the difference between the allotment price and face value of Rs100. The allotment price would be approximately equal to the price of one gram of gold.
The scheme will be managed by Gautam Kaul and it will be benchmarked against the domestic price of physical gold.
Investors say paintings in which they invested were priced too high and hence could not find any buyers. Copal not too keen on promised buyback, says it was a “goodwill gesture”
Investors, who put their money into art funds launched by Copal Art in 2006, have alleged that they have been cheated by the management and haven't got their money back.
Copal's business model allowed investors to actually possess the paintings they invested in. Later, when the paintings would appreciate in value, they were to be sold through Copal's portals. Investors were promised multiple returns.
About a year ago, the company offered to buy back those paintings owned by its investors that had remained unsold. Investors, however, have complained that the exercise has not resulted in returns.
"There are four cases of cheque bounce and stop payments. These investors got money from Copal after sending legal notices. It's very difficult to believe Copal's promises and after the cases of cheques bouncing, investors are afraid of sending the painting (to Copal) without receiving the amount on the cheque," says Sachin Kaluskar, a financial advisor. Back in 2006, Mr Kaluskar was a partner of InvestmentIdea Financial Services that handled many transactions for those investing with Copal.
Strangely, Copal denies it is an art fund and says there is no buyback policy. "We would like to clarify that Copal is not a fund. Copal is an art advisory for emerging and established collectors of art," says Ajay Seth, chief mentor, Copal Art. "According to our service terms and conditions, we do not offer a buyback facility. The buyback service was an exceptional service provided as a goodwill gesture."
Mr Seth insists there are no instances of investors not receiving their money in full if they have returned the paintings to Copal, and that they are always in touch with their clients.
Investors, have a different story. Amit Makwana, from Junagadh, had invested in Copal's art fund, and also got some of his friends to do so. "I have not got my Rs2 lakh back. I had invested in a painting which was priced at Rs7,500 per sq ft on canvas. Now, I cannot sell at such a price, so I am holding back."
One of Mr Makwana's friends threatened Copal with legal action, after which, the fund agreed to buy back his paintings. However, Copal asked him not to deposit the cheque that he received, saying that the money was being transferred. When the cheque was deposited after two-three months, it was revealed that there was a stop payment order against it. When the investor threatened to go to court, Copal transferred his funds to his account.
Baroda-based advocate Amit Shah has filed legal complaints against Copal on behalf of two investors. "One investor got his money back after almost six months of dilly-dallying, after we filed a criminal complaint under Section 138 of the Indian Penal Code when the cheques for the buyback scheme bounced. Copal also claims that the paintings were damaged, which is a lie, because investors know how to take care of their investments. My second client has a huge portfolio of Rs45 lakh with Copal, and his case has suffered the same delay."
Though Copal denies not paying any investor, there have been many complaints. A chemical trader from Surat is following up with Copal for payment on behalf of his friends as well, but they have not received any money. A managing director of a chemical company is saddled with a Kishore Shinde painting-cum-sculpture since 2008, which hasn't found any buyers despite Copal's assurances.
Copal Art, a gallery in New Delhi, launched two art funds at a time when the economy was going through a short 'feel-good' phase. Unlike high-flying Osians which catered to HNIs, Copal said it was different-it allowed people to enter with an amount of Rs1 lakh.
But with the recession in 2008, all dreams crashed. Investors discovered that Copal had priced the paintings so high that there were no takers in the market. Replying to a question, Mr Seth said art had to be withheld for 3-4 years for value appreciation. Pressured by investors who threatened legal action, Copal decided to buy back the paintings from investors. The buyback is expected to finish by December.
The price of gold in India has been on a bull run for the last 13 years. Are gold prices nearing a bubble?
Big investors and researchers predict that gold is headed towards a bubble. In January last year, George Soros, the famous Hungarian-American billionaire investor and stakeholder in the Bombay Stock Exchange, cautioned: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold." He was speaking at the World Economic Forum in Davos.
Was Soros just talking through his hat, as he deliberately does many times? Apparently, from the middle of last month, the billionaire investor sold off 99% of his holdings in gold for $800 million, including whatever profit he made during the gold climb. Soros is one of the world's finest speculators and his action should worry some investors who might do well to ask: 'Is it true that gold prices have reached their peak?' The question is even more important, given that there is tremendous interest in gold in India.
From a master speculator, let's turn our attention to academics immersed in arcane quantitative concepts. In December 2010, a team from the Research Institute of Mining Geomechanics and Mine Surveying (VNIMI) and the Russian Academy of Sciences started looking at whether gold is in a bubble and they published their findings in a paper titled "Log-Periodic Oscillation Analysis and Possible Burst of the 'Gold Bubble' in April- June 2011". The researchers Sergey V Tsirel, Askar Akaev, Alexey Fomin and Andrey V Korotayev, came to a simple conclusion that gold is in a bubble and it is about to burst.
The team applied the methodology used by Didier Sornette, professor of the Swiss Finance Institute who is well known for his work on the prediction of crises and extreme events in complex systems. Using this method, known as "the Log-Periodic Oscillation analysis", the researchers calculated the probable time of the crash between April and June 2011. To further reinforce their prediction, the result was further verified by two other methods.
First, they compared the pattern of the gold price to the pattern portrayed by the oil bubble crash of July 2008, which gave them the timing around May-June 2011. Second, they estimated the critical time for the hyperbolic trend in the socio-economic processes (like population growth before the demographic transition, global GDP growth and energy production per capita, and so on). This also led them to May-June 2011 as the most probable time for the gold crash. The calculations also estimated a price range of $1,500-$1,700 when gold could top out.
The team of four of course provided a disclaimer saying, "The calculations performed by Sornette's method and other estimates are based on the idea that all players will try to maximize profit just in this market, and will not believe in forecasts like the one we propose (otherwise we shall deal with a "non-self-fulfilling prophecy"). If a very large player, such as the Central Bank of China, intervenes with other goals (longer-term, depending on political calculations, etc.), then the foundation upon which all such forecasts are based disappears." Like all predictions, their calculations too are based on assumptions that could turn out to be wrong.
Regarding the overall economic impact, should the gold price actually crash, the researchers write that the crash would lead to huge losses and even bankruptcy of major players in the markets, including dependent firms and banks. This negative reaction will be amplified by the media, drawing similarities with the events of the early 1980s and other such similar events. "The burst of 'the golden bubble' will be followed by a short-term downswing, and the further developments will depend on the directions of investment at the moment, as well as on the reaction of the US Federal Reserve and the Central Bank of China to the events." On the positive side, if at the time of the collapse some promising areas of investment appear in the developed or developing countries, investment capital can be moved to those markets, which would contribute to the production of new goods and services and accelerate the way out of the crisis.
Coming back to the main question, "Is it safe to buy gold now?" We at Moneylife have always considered gold as a purely speculative asset (Read: "Are gold prices infallible?")
Benjamin Graham, the famous investor, referred to speculation as the "greater fool" theory by saying, "I know I am a fool to pay such a high price for a stock, but I know that a greater fool will come along and pay me an even higher price." Though Graham was speaking about stocks, the same could be said about speculative instruments such as gold, beyond a point. Therefore, before buying gold think again.(You may also want to read, "Gold: All told")