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Against gold as an asset class as it can surprise you even in the short run: Dhirendra Kumar, Value Research



Sovereign gold bonds are most safe because these are issued by the government and appreciation of gold is factored into those bonds, Dhirendra Kumar, CEO, Value Research, tells ET Now.

Edited excerpts: 

I know as a principle you are not quite fond of gold ETFs, but at a time when the world is in a risk-off mode, perhaps it is prudent to have at least 5% to 10% of allocation to gold as an asset?

I am not against gold ETFs but I am against gold as an asset class. It is a store of value but nothing beyond that. It is not an investment. Investment is something which yields something for some underlying reason and gold has none of those variables. It just sits in your locker and if you have too much of it, you have to spend money to preserve it, ensure its safety.

You have earning from equity, interest coming from fixed income, rent coming from real estate. Gold does not produce anything. It entirely depends on fear. Great returns depend on a very fearful outlook for future. That apart, it is a store of value. It is a very old asset class. It has seen through generations.

Also, its physicality has historically lent some credence to having gold in a certain form. I do not think one should look at gold as an investment.

Something happened ten years ago when the fixed income market tanked globally and the global financial crisis coincided with financialisation of gold. We saw the gold ETFs. We saw the gold derivatives and that was the time when gold really took off globally. We had a certain surge of gold… the timing was perfect. The mechanism to actually own gold became simple. You can have it in a financial form. As little bit of normalcy returns, gold loses its charm as an investment. It was a one-off situation ..

Net-net would you say that if at all you are looking at gold as an investment opportunity it should be from a short-term timeframe and not a long-term allocation?

Yes, at best you can take a punt on gold when things look grim and 10-year return or five-year return on gold is 1.25% and with taxability it is virtually nothing. It just remains as a store of value. 10- year return looks very impressive but that was actually the low. We saw the big surge of about 8% return in 10 years, but during this period inflation was not low. So, real return from gold on a long term basis may not be there.

Yes, one can take a short-term view but I do not think most individual investors should be taking a short-term view. You should be guided by your own plan and for short term, you have fixed income where you get predictable returns because even in the short run, gold can surprise you.

Here is the thing about investing in gold via the ETF route. A lot of people still believe that having gold in physical form is perhaps better. Could you draw that comparison and give a sense on how that may not be the most prudent exposure?

Yes, there are different forms in which you can own gold today. The raw form is having the gold coin available from a bank and somewhat underwritten purity. It is easy to buy, but hard to sell.

Then the next is buying the gold ETF in the financial form. You can buy it but the return that you get is less the expenses, which is about 1-1.25%. Then the next easy form is gold fund, which in turn buys the gold ETF. It replicates the performance of gold less expenses of the fund. So you get lower returns and that expense can well go up to 1.5-2%. So you get 2% lower return on the gold fund as compared to 1% on the gold ETF which you have to buy like a stock.

A new thing has come about which I think is very interesting. It is the sovereign gold bonds. Here you get gold performance– the return available from gold. It has the highest safety because it is issued by the Government of India and it underwrites the appreciation of gold factored into those bonds. You get some interest over and above that, 4% more and holding it over more than three years is also subject to indexation benefit. That is the finest form. If at all you are a long- term gold believer, that is the best way to hold it because here you will not only get the returns available from gold, but even more than that. All other forms have expenses which lower the return.

What is the lure of a gold ETF versus a traditional mutual fund?

If you are long-term investor, choose your multicap fund and be at it, stay on course, stay calm and carry on. I you do five-seven years and more regular investing, you win.

Courtesy: The Economic Times

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