BY THE time the sun sets on 2010, gold will be crowned the best asset class of the year, both in terms of return as well as stability of performance.
The yellow metal has appreciated continuously in the past 10 years since 2001. While it gave around 25 per cent return in 2010, price volatility was much lower compared with other asset classes, especially equities. If gold was seen as an alternative investment option till now, 2010 saw it gain a 'must have' status in any investment portfolio.
The fact that the precious metal has moved consistently, independent of the factors that drove other asset classes, has helped increase investors' confidence.
The rising investment appeal of this asset class is also evident from the fact that besides physical gold, many more avenues have emerged for investors in the yellow metal in the recent past.
The year 2010 saw the launch of three new gold-backed exchangetraded funds while the National Spot Exchange introduced e-gold, which allows retail investors to trade in gold in paper form.
In the international market, gold prices moved from $1,096.25 an ounce in the beginning of the year to a high of $1,431 in December.
Barring July, gold prices moved up steadily month after month. It touched a new peak every month between August and December.
In the domestic market, gold stood at Rs 16,905 per 10 gm at the start of the year, crossed Rs 18,000 in May, Rs 19,000 in June, Rs 20,000 in October and Rs 21,000 in December.
Indian consumers' confidence in gold as a reliable and safe asset class was highlighted further by the Reserve Bank of India's purchase of 200 tonnes of the yellow metal from the International Monetary Fund at the end of 2009.
The average daily volatility in gold in the past three years has been much lower at 1.16 per cent compared with over two per cent in Nifty, said Harish Galipelli, head of research at JRG Wealth Management.
Sovereign debt worries in the euro zone, fears of a double-dip recession, a struggling US economy and inflationary pressures back home helped gold gain prominence as a safe haven asset. It also remained the most preferred hedging tool against the euro and the US dollar through the year.
A surge in investment demand for paper gold as well as physical gold in China and India only added to its sheen.
China, which had opened up its gold market in 2002 after 50 years of state control, relaxed the rules further in 2010, triggering heavy demand for the yellow metal, Mathews pointed out.
Chinese consumers' investment in gold almost doubled this year to $6.7 billion due to growing concern over inflation, restrictions on the real estate market and government attempt to cut its exposure to a weaker dollar. Spot gold trades at the Shanghai Gold Exchange were up 43 per cent in terms of volume.
In India, demand for gold surged to pre-credit crunch levels.
At present, India and China together account for approximately 25 per cent of annual gold demand on earth. Commodity experts say gold will appreciate at least 15 to 20 per cent in 2011. Global economic worries that triggered the gold price rise in 2010 are likely to continue in the New Year too.
As such, investment demand in gold is also expected to grow. Moving out of a bearish trend by the beginning of the decade, gold has been moving upward since 2001.
The previous metal plays many roles in times of economic downturn - as a hedge against inflation and a safe haven investment option. As we don't see any quick recovery from global economic worries, gold's upward cycle is unlikely to get disturbed.
Physical demand for the metal may come down at a higher level, but this will be compensated by investment demand.
Investment banking and securities firm Goldman Sachs expects gold futures to climb to $1,690 an ounce by the end of 2011 and continue to move higher.
According to Bombay Bullion Association, the country's gold imports are likely to touch 780 tonnes in 2010, surging 77 per cent from 439 tonnes last year. Imports had dipped in 2008 by over 45 per cent from around 800 tonnes in 2007. As per WGC estimates, India has over 18,000 tonnes of gold stock with private persons, government and institutions, worth approximately $800 billion, which represents 11 per cent of the global stock.
Some estimates show Indians save around 30 per cent of their total income, of which around 10 per cent goes into gold. And there are options galore: Jewellery: As per WGC figures, India remains world's largest gold jewellery market and gold jewellery demand rose 67 per cent year-on-year to 272 tonnes in the first half of 2010.
Wedding-related demand accounts for a substantial proportion of the overall jewellery consumption.
Recycling of gold has slowed down as consumers hold on to their assets, expecting further price gain.
Coins and bars: Coins and bars account for 25 per cent of India's gold demand. Apart from banks and jewellery retailers, coins and bars are available also through post offices and micro-finance organisations. WGC had extended its India Post gold retail programme to 700 post offices.
Gold futures: Gold futures suit investors who wish to have a larger exposure to the yellow metal.
Futures prices closely track international prices and offer higher leverage compared with other instruments. In 2010, volumes were higher in Gold Guinea, Gold HNI and Gold Mini contracts on the MCX compared with regular contracts.
The higher volumes show increased interest in futures contracts among retail investors.
Gold ETFs: Gold exchange-traded funds emerged the most popular investment option in 2010. World's largest gold ETF , SPDR Gold Shares, held $40 billion assets by midNovember. In India, three more gold ETFs were added to the basket of six existing products. Assets under management of the gold ETFs more than doubled from Rs 1,425 crore in January to Rs 3,464 crore in November. ETFs that follow international prices gave an average yearly return of 20 per cent. Gold holding of these ETFs doubled in two years and is close to 14 tonnes now.
The number of gold ETF investors too has gone up from 60,000 to over 150,000. Gold BeES Benchmark ETF saw the number of investors rise from 50,000 in 2009 to 100,000 in 2010. The ETF gained confidence of investors in 600 towns compared with 500 towns in 2009. Gold BeES' AUM rose from Rs 630 crore on January 1 to Rs 1,600 crore by December 15.
Gold funds: Good fundamentals in the commodity as well as gold mining company stocks have managed to increase investor interest in gold funds such as DSP Black Rock World Gold Fund and AIG World Gold Fund. DSPBR gave a yearly return of 25.73 per cent while AIG earned 28.61 per cent in 2010.
Investors who are bullish on gold and are comfortable with high risk and high returns from gold stocks prefer these funds.
However, these funds do not gain with every price gain in the metal.
E-gold: National Spot Exchange launched e-gold in March 2010 in demat form. E-gold in denominations as small as one gm and its multiples is meant mainly for retail investors. The product follows domestic gold prices and ensures physical delivery too. In the 10 months till December 15, e-gold saw a turnover of Rs 689 crore.
There is exponential growth in turnover volumes of e-series products on the NSEL platform. This shows the suitability of this product to cater to investors' appetite. E-gold has given a return of 21.51 per cent since launch.
