Derivatives

‘Gold’s historic and implied volatility is lower than that of most risk assets,’ says Nippon MF’s Vikram Dhawan

Rajalakshmi Nirmal | Updated on November 01, 2020 Published on November 01, 2020

Vikram Dhawan, Head of Commodities at Nippon India Mutual Fund

One should avoid long-term investment decisions based on short-term price trends: Vikram Dhawan, Head of Commodities at Nippon India Mutual Fund

With a very sharp rally in gold prices, there’s one pressing question in every investor’s mind: “Will the current high prices sustain?” In an interaction with BusinessLine, Vikram Dhawan, Head of Commodities at Nippon India Mutual Fund, answers this and other questions on gold. Excerpts from the interview:

Gold price has had a sharp rally this year. But it seems to find it difficult to sustain above $1,900/oz. What’s your view on gold prices from here?

Short-term price trends have noise — one should avoid taking long-term investment decisions based on them.

Gold’s historic and implied volatility is lower than most risk assets’ and, therefore, gold can test the resolve of traders and tactical investors.

Post 2001, 2008 and 2020 financial crises, trade wars, etc, the US dollar no longer appears as mighty or invincible.

Especially as investors and central banks of all stripes have realised that the US Federal Reserve won’t hesitate to print dollars and risk huge imbalances in the global financial system and imperil the US dollar, to shore up the US economy.

This has resulted in a jump in demand for gold for diversifying investment portfolios and central bank reserves.

In addition to that, we have seen structural decline in both real and nominal interest rates in the past few decades — that makes gold an attractive proposition.

So, the ongoing gold bull market has been building up for quite some time and may continue as long as the majority of factors underpinning the investment and diversification demand for gold are in place. Instead of hazarding a forecast of gold prices that may or may not play out in the near future, one may rather identify the risks in one’s portfolio and evaluate if gold can be a possible solution to mitigate them.

Are there any risks in gold investments for Indian investors?

With regards to the mutual funds space, Gold ETFs (exchange-traded funds) and gold saving funds are SEBI-regulated investments products and offer an efficient and easy way to invest in gold.

Gold ETFs are backed by physical gold bars adhering to prescribed global quality and purity standards. Gold ETFs are more liquid than the underlying physical markets and have lower impact costs for retail investors.

However, there are other avenues in gold besides gold ETFs, and investors should make their own assessment before selecting an investment product aligned to their investment objectives, keeping in mind safety and liquidity.

The high price of gold has seen consumer demand drop sharply in India, as reflected in import numbers. But how is investment demand?

Financial crises often result in higher gold prices and economic uncertainty that push back consumer demand.

However, unless the purchasing power of consumers is impaired significantly, the demand catches up in subsequent years, notwithstanding higher prices.

This year has been a record year of investment demand for gold. Inflows into gold ETFs across the world have exceeded an unprecedented 1,000 tonnes. We have seen record flows in India, too.

When investors in India, like their Western counterparts, increasingly perceive gold to be a portfolio diversifier rather than a tactical play, flows into gold ETFs in India may rise significantly, way beyond the record flows seen this year.

How good is gold as a diversifier in an equity portfolio? How are the correlations currently in the Indian market?

Gold tends to be poorly or negatively correlated to equities over a longer period.

Gold is liquid and carries no credit risk. A lot of studies have been done on gold as a portfolio diversifier.

One of the recent ones was by the World Gold Council and its analysis illustrates that adding between 6 per cent and 17 per cent in gold to a hypothetical, average Indian pension fund portfolio over the past decade would have resulted in higher risk-adjusted returns.

If an investor wants to do systematic investments in gold, what is the best option?

Gold savings funds offer the SIP (systematic investment plan) option. The underlying is gold ETFs. The key attributes of pure old that make it compelling are purity, safety and liquidity. Gold ETFs retain the same along with the convenience of a mutual fund.

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Published on November 01, 2020
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