Gold is getting riskier:: Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

When investors make a beeline for an asset, its risks automatically escalate.

One big misconception about gold is that it is a ‘safe' investment that protects your portfolio. If protection is defined as the ability to deliver less volatile returns, gold fails the test. Measures such as standard deviation suggest that gold prices have been suffering higher intra-day swings in recent times than in the past. In fact, in 2011, the daily price variation in gold was much the same as that in the Sensex.

INVESTMENT DEMAND

The higher price volatility in gold is a function of the shifting demand patterns for the metal worldwide. Gold has already made the transition from being a pure commodity to an investment avidly pursued by global investors. A few years ago, global demand for gold originated mainly from jewellery buyers, with industrial users and investors also chipping in with purchases.

Not so now. Latest statistics from the World Gold Council show that investment demand for gold — from gold funds, exchange traded funds, bars and coins — overtook jewellery demand in the third quarter of 2011. In fact, as much as 40 per cent of the annual gold demand now comes from investors.

Now, when investors make a beeline for an asset, its risks automatically escalate. Consumers buy an asset when its prices fall, but investors pour in money when the returns look good. It is not surprising that investors are seeking out gold after it has completed a nine-year run of positive returns.

The question though is — will their interest sustain if returns taper off, or worse still, if gold prices retreat?

NEW RISKS

Investment flows that flood into a fancied asset in a bull market can be pulled out with equal alacrity when a correction begins.

Therefore, if gold prices do correct from these levels, they can suffer steeper falls than in the past.

The newfound investment appetite for gold has also added half a dozen new variables to the factors that impact gold prices. Today, a recovery in US equities, the downgrade of yet another European nation, China's decision to curb lending or a blip in the Rupee can all affect returns for Indian gold investors.

In fact, it is gold's ascent as an investment that has broken down its traditional relationships with other assets. Gold has traditionally been recommended as a diversifier for any investor's portfolio because it shares a negative correlation (tendency to move in the opposite direction) with equities. In India, at least, this negative correlation no longer exists.

The marginal negative correlation that gold (in rupees) displayed with Sensex returns two years ago has transformed to a small positive correlation now. The correlation is still small enough to ensure that gold doesn't move in step with the Sensex. But gold may not offer the certainty of gains if the Sensex goes into a tailspin.