GOLD AS A TACTICAL LONG -TERM STRATEGIC ASSET

GOLD AS A TACTICAL LONG -TERM STRATEGIC ASSET

Dr. SATHISHA H. K

Assistant Professor

Govt. Ramnarayan Chellaram College of Commerce and Management

Palace road, Bengaluru, Karnataka, India.

SOWMYA G. S

Assistant Professor, Centre for PG Studies,

Sindhi College, Hebbal, Bengaluru, Karnataka, India.

Abstract

Gold is a source of long-term capital gains, and the gold market is both deep and liquid,

liquidity is an important but sometimes forgotten factor when establishing a strategic holding

by investors. The yellow metal has not only outperformed all major fiat currencies, but also

bonds or commodities. Gold is a great portfolio diversifier due to its low correlation to most

mainstream assets. This is a particularly desired feature during periods of heightened risk, when

gold benefits from flight-to-quality, providing positive returns. Gold is thus a safe-haven asset

during periods of crises, which reduces portfolio losses, and an insurance against tail risk.

holding gold as part of a well-diversified portfolio can improve performance. The introduction

of gold ETFs made gold an even more popular asset class and one easier to invest in. The

opportunity costs of holding gold has decreased substantially, gold should be more in demand

as a safe haven and a hedge against systemic risk, stock market pullbacks, and central banks'

unconventional monetary policies. In a heavily indebted world, a liquid asset with no credit or

counterparty risk is literally worth its weight in gold.

Index Terms : Gold, Strategic asset, Tactical, Risk, Return, Relationship

International Journal of Research

Volume IX, Issue III, March/2020

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Introduction

Why should gold be the commodity that has this unique characteristic? It has a long

history as the first form of money. It then became the base for the gold standard which set the

value for all money. For this reason, gold confers familiarity. It creates a feeling of safety as a

source of money that will always have value, no matter what. Gold's characteristics also

explain why it's uncorrelated with other assets. These include stocks, bonds, and oil. Gold's

price doesn't rise when other asset classes do. It doesn't even have an inverse relationship like

stocks and bonds do with each other.

Instead, it is a reflection of many other investor sentiments. That makes another reason

to have gold as part of a well-diversified portfolio in today's globalized world where most asset

classes end up being highly correlated. Gold should not be bought alone as an investment. Gold

itself is speculative and can have high peaks and low valleys. That makes it too risky for the

average individual investor. Over the long run, the value of gold doesn't beat inflation. But gold

is an integral part of a diversified portfolio. It should be included with other commodities such

as oil, mining, and investments in other hard assets. Gold benefits from diverse sources of

demand: as an investment, a reserve asset, an adornment and a technology component. It is

highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its

value over time.

Over the last 10 years, the BSE Sensex has generated a CAGR of about 6.22 per cent

while gold has generated about 9.4 per cent Falling inflation, crashing equity markets and

impending recessionary fears would have been considered the right ingredients for the gold

price to go up. Gold, after all, has been traditionally seen as a safe haven for keeping one’s

money. However, the gold price is not seeing the spike as was expected from the yellow-metal

in times of financial crisis. The long term returns in the gold price have, however, been

impressive especially against its competitive asset class of equity. After the recent equity

market meltdown, the long term returns in gold is looking better than equity.

Over the last ten years, the Nifty 50 has generated a compounded annualized growth

rate (CAGR) of about 6.01 per cent (as on March 16, 2020), an absolute return of about 79 per

cent, while the BSE Sensex has generated a compounded annualized growth rate (CAGR) of

about 6.22 per cent (as on March 15, 2020), an absolute return of about 82 per cent. The gold



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returns in the last 10 years, on the other hand, has generated a CAGR of about 9.4 per cent or

an absolute return of nearly 145 per cent. Recessionary fears could result in rising gold prices

and investors can take exposure in their portfolio for the sake of diversification.

Figure No. 1: Determinants of Gold Valuation

Economic expansion: periods of growth are very supportive of jewellery, technology

and long-term savings

Risk and uncertainty: market downturns often boost investment demand for gold as a

safe haven

Opportunity cost: the price of competing assets, especially bonds (through interest

rates) and currencies, influence investor attitudes towards gold

Momentum: capital flows, positioning and price trends can ignite or dampen gold's

performance.

Literature Review:

Michis, (2014)1 examined the contribution of gold to portfolio risk over different time scales.

A portfolio considered for the study included gold, stocks, 10-year government bonds and 3-

month treasury bills. The study result suggests that lowest contribution to portfolio risk is

provided by gold only when it is considered for medium and long-term investment prospects.

Baryshevsky, (2011)2 deliberated the tempting of gold as a long-term asset of investment. It is

observed that 10 year average gold yield correlates with the current real earnings yield, hence

market participants tend to neglect commodities in general, and gold in particular during

earnings multiple expansion phase and vice versa. The researcher opined that portfolio picked

1 Michis, A. A. (2014). Investing in gold: Individual asset risk in the long run. Finance Research Letters, 11(4), 369–374. https://doi.org/10.1016/j.frl.2014.07.008 2 Baryshevsky, D. V. (2011). The Interrelation of the Long-Term Gold Yield with the Yields of Another Asset Classes. SSRN Electronic Journal, 2001(December), 4–11. https://doi.org/10.2139/ssrn.652441

Str

ateg

ic Economic expansion

Long-term returns

Risk and uncertainty

Hedging and Deversificaation

Tacticaal

Opportunity costRelative

Attractiveness

Momentum Amplifies Trends



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correctly with a composition of gold and stocks allows to reduce the total portfolio risk

outstandingly.

McCown & Zimmerman, (2006)3 in their research article mentioned that approximately gold

has the same mean returns as a Treasury bill and bears no market risk. But silver has a returns

inferior to Treasury bills and also bears no market risk. It is observed that prices of both gold

and silver are cointegrated with consumer prices and shows the evidence of inflation-hedging

ability. Especially gold shows stronger inflation-hedging ability compared to silver.

Davidson, Faff, & Hillier, (2003)4 examined the role of gold in modern international asset

pricing. It is observed that although the real value of gold has declined over recent years,

corporate exposure to this historically prominent commodity is still strong. The study result

showed that still gold remains its importance in today’s economy.

Jaffe, (1989)5 in his study mentioned that gold stocks are expected to be better investment

vehicle than gold itself, as they do not share high liquidity, consumption and convenience

values of gold. It is observed that adding a combination of gold proxies i.e. gold stocks to the

hypothetical diversified portfolios raises their mean return and also increases their standard

deviation. It is concluded that increase in return is more than compensates for the increased

risk.

The Gold Conundrum

Many investors have never seriously considered gold to be a long-term investment, but

the topic of investing in gold did come to the forefront of many investors' minds during the

2008–2009 recession. The most obvious reason for this was due to the rise in the price of gold.

Market watchers love to sensationalize any stock or asset class experiencing rising prices as

the next investment to latch on to. Yet the rise in the price of gold happened largely due to

3 McCown, J. R., & Zimmerman, J. R. (2006). Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.920496 4 Davidson, S., Faff, R., & Hillier, D. (2003). Gold factor exposures in international asset pricing. Journal of International Financial Markets, Institutions and Money, 13(3), 271–289. https://doi.org/10.1016/S1042-4431(02)00048-3 5 Jaffe, J. F. (1989). Gold and Gold Stocks as Investments for Institutional Portfolios. Financial Analysts Journal, 45(2), 53–59.



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people purchasing physical gold or betting on the metal via various investment options, such

as ETFs or gold mining companies' stocks.

Unlike other commodities, gold has held the fascination of human societies since the

beginning of time. Empires and kingdoms were built and destroyed over gold and mercantilism.

As societies developed, gold was universally accepted as a satisfactory form of payment. In

short, history has given gold a power surpassing that of any other commodity on the planet,

and that power has never really disappeared. The U.S. monetary system was based on a gold

standard until the 1970s. Proponents of this standard argue that such a monetary system

effectively controls the expansion of credit and enforces discipline on lending standards, since

the amount of credit created is linked to a physical supply of gold. It's hard to argue with that

line of thinking after nearly three decades of a credit explosion in the U.S. led to the financial

meltdown in the fall of 2008.

Methodology

Gold is a physical commodity subject to the vagaries of supply and demand. The value

of gold often changes quickly, and gold's price moves can be quite large at times. It also has a

habit of performing poorly when the stock market is doing well. In this paper the study is

focused on ways to invest on gold and also it also covers the Strategic reasons to invest on

Gold. The descriptive methodology of research adopted for the study. To justify the strategic

reasons secondary data is used, as a plan of analysis tables, charts and figures are used.

Different ways to Buy and Invest in Gold

There are ways of owning gold - paper and physical. one can buy it physically in the

form of jewellery, coins, and gold bars and for paper gold you can use gold exchange traded

funds (ETFs) and sovereign gold bonds (SGBs). Then there are gold mutual funds (fund of

funds) which further invest in gold ETFs. There are gold MFs (fund of funds) which invest in

the shares of international gold mining companies.



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Table No. 1 : Different ways of investing in Gold

Gold Gold ETFs (Exchange

Traded Funds) Gold Funds

Investment in physical gold

The investor buys a

proportionate value of gold but

not in the physical form

The investment is made in bullion

and companies involved in mining

gold

No need for Demat account The investor needs a Demat

account

No need for a Demat account to

invest

Market fluctuations directly

affect the prices of gold

Changes in the gold prices

affect that of gold ETFs

Changes in the gold prices don’t

affect gold funds directly

No additional charges other

than the physical gold itself

Gold ETFs involve asset

management and brokerage

fees

There’s a minimum charge to

manage the gold funds.

Risks of theft and burglary

associated with storing

physical gold

Gold ETFs remove the burden

of trading gold in the physical

form

Eliminates the risk of

theft/burglary and buffers

investments to changing market

fluctuations

No paperwork required for

investing

Paperwork required for

investing in gold ETFs

Paperwork is required

for investing in gold funds

Systematic Investment Plan

(SIP) not available

No SIP option

SIP available

Best suited for conventional

investors

Best suited for investors who

have the required time and

skillset to trade

Best suited for investors who

expect high returns by taking

calculated risks

PHYSICAL GOLD

Jewellery

Indians certainly cherish possessing gold. But owning it in the form of jewellery has its

own concerns about safety, high costs, and outdated designs. Then there are the 'making

charges', which could prove to be a costly affair.

Gold Coin Scheme

Gold coins can be bought from jewellers, banks, non-banking finance companies, and now

even e-commerce websites. The government has launched ingeniously minted coins which

will have the National Emblem of Ashok Chakra engraved on one side and Mahatma

Gandhi on the other. The Indian Gold Coin and Bar will be of 24 karat purity and 999



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fineness carrying advanced anti-counterfeit features and tamper proof packaging. All coins

and bars will be hallmarked as per the BIS standards.

Gold savings schemes

Gold or jewellery savings schemes come in two forms. A typical one allows you to deposit

a fixed amount every month for the chosen tenure. When the term ends, you can buy gold

(from the same jeweller) at a value that is equivalent to the total money deposited, including

a bonus amount. This conversion is done at the gold price prevailing on maturity. In most

cases, the jeweller adds a month's instalment at the end of the tenure as a cash incentive or

may even offer a gift item.

PAPER GOLD

Gold exchange traded funds (ETF)

An alternate way of owning paper gold in a more cost-effective manner is through gold

exchange traded funds (Gold ETF). Such investments (buying and selling) happens on a

stock exchange (NSE or BSE) with gold as the underlying asset.

Sovereign Gold Bonds (SGB)

Sovereign Gold Bond is another way of owning paper gold. They are issued by the

government but availability is not 'on-tap basis'. Instead, the government will intermittently

open a window for the fresh sale of SGBs to investors. This could typically happen every

2-3 months and the window will remain open for about a week. For investors looking to

purchase SGBs anytime in between the only way out is to buy earlier issues (at market

value) which are listed in the secondary market.

Digital gold

Investor can now purchase gold coins, bars and jewellery online. 'Digital Gold', is offered

on the mobile wallet platform of Paytm and 'GoldRush' is offered by the Stock Holding

Corporation of India on their website, while Motilal Oswal has launched Me-Gold, a digital

gold online investment. All of these are offered in association with MMTC - PAMP, (a

joint venture between public sector MMTC and Switzerland's PAMP SA)

Strategic Reasons to Invest in GOLD

1. Hedge against inflation

When inflation rises, the value of currency goes down. Over the long term, almost all major

currencies have depreciated in value relative to gold. Therefore, people tend to hold money



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in the form of gold. In times when inflation remains high, especially when it is in high

double digits, over a longer period in the economy, gold becomes a hedge against

inflationary conditions.

Figure No. 2 : Gold annual return during inflation

2. Tangible asset

Gold is one of the few assets that is tangible, and thus, it creates a perception of safety

among investors. Purchasing gold is much easier compared to purchasing other tangible

assets such as real estate.

Figure No. 3: Gold Annual Price and Annual Return for the period 1964 - 2019

0%

2%

4%

6%

8%

10%

12%

Nominal Return Real Return

Aver

age

Annual

Ret

urn

Low Inflation (≤ 6%) High Inflation (> 6%)

-25

-5

15

35

55

75

0

5000

10000

15000

20000

25000

30000

35000

196

4

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6

196

8

197

0

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6

197

8

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0

198

2

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6

198

8

199

0

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0

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8

201

0

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2

201

4

201

6

201

8

Ret

urn

Pri

ce

Price (24 karat per 10 grams) Return



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3. For portfolio diversification

It is believed by some economists that gold is a highly effective portfolio diversifier due to

its low to negative correlation with all other major asset classes. Still, as a rule, gold shows

no statistically significant correlation with mainstream asset classes. when shares are falling

rapidly in value, an inverse correlation can develop between gold and equities. Gold

protects one's portfolio from volatility because the factors, both at the macro-economic and

micro-economic fronts that affect the returns of most asset classes do not significantly

influence the price of gold. For a given level of returns from a portfolio, the risk or volatility

can be reduced by adding gold to it.

The 1970s was great for gold, but terrible for stocks.

The 1980s and 1990s were wonderful for stocks, but horrible for gold.

2008 saw stocks drop substantially as consumers migrated to gold.

Figure No. 4 : Diversification among Investment Assets

Figure No. 4 shows that the proportion of investment on equity gradually decreased from

60% to 40% during the period 1998 to 2018. Alternative assets including gold claimed the

more weightage in investment. In 1998 it was 7%, which increased over a period of time

which have a weightage of 26% of total investment in 2013 & 2018.

4. Provides liquidity

At the time of need, investments in gold can be liquidated much faster than other physical

assets like real estate. Unlike many other assets there is no lock-in period in gold

investments except for sovereign gold bonds. The redemption amount in case of physical

60%51% 48% 43% 40%

30%36%

32%28% 31%

7% 12%19%

26% 26%

3% 1% 1% 3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1998 2003 2008 2013 2018

Equity Bonds Alternatives Cash



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gold will, however, depend on the purity of the gold, denomination and other factors

including the market price.

5. Geopolitical Uncertainty

Gold retains its value not only in times of financial uncertainty, but in times of geopolitical

uncertainty. It is often called the "crisis commodity," because people flee to its relative

safety when world tensions rise; during such times, it often outperforms other investments.

6. Deflation Protection

Deflation is defined as a period in which prices decrease, when business activity slows and

the economy is burdened by excessive debt. During the Depression, the relative purchasing

power of gold soared while other prices dropped sharply. This is because people chose to

hoard cash, and the safest place to hold cash was in gold and gold coin at the time.

Table No. 2 : Top performing Gold funds in India

Fund NAV

Net

Assets

(Cr)

3 MO

(%)

6 MO

(%)

1 YR

(%)

3 YR

(%)

5 YR

(%)

2019

(%)

Aditya Birla Sun Life Gold Fund. 13.6093 89 11.5 13.9 33.4 12.4 9.1 21.3

SBI Gold Fund. 13.8959 434 14.5* 18.2

* 37.8* 14

* 9.4* 22.8

*

Nippon India Gold Savings Fund. 17.9696 823* 11.8 15.5 34.1 12.5 8.8 22.5

HDFC Gold Fund. 14.2666 329 14.2 18 36.9 13.8 9.3 21.7

Kotak Gold Fund. 18.0117* 244 11.4 14.4 35.2 13.4 8.9 24.1

Axis Gold Fund. 13.4926 67 11.9 15.2 34.8 12.7 7.8 23.1

ICICI Prudential Regular Gold

Savings Fund. 14.2272 103 9.9 13 30.4 11.7 8.8 22.7

IDBI Gold Fund. 12.2884 35 12.3 13.1 33.9 12.1 7.9 21.6

(Sources : Fincash.com)

7. Increase in demand

Increased wealth of the emerging economies boosted the demand for gold. In most

countries, it is intertwined into its culture. Indians buy a lot of gold especially during the

wedding season and China buys gold bars as they are a traditional form of saving. The gold

demand has been growing among the investors as well.



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Table No. 3 : Multi-asset allocation funds with investment in gold

Funds Net Assets (Cr) Allocation of

Gold %

SBI Multi Asset Allocation Fund 245 18.25%

HDFC Multi-Asset Fund 227 16.98%

Sundaram Multi Asset Fund 39 18.58%

ICICI Prudential Multi-Asset Fund 11138 11.60%

Axis Triple Advantage Fund 307 14.00%

8. A source of returns

Although the price of gold can be volatile in the short term, it has always maintained its

value over the long term. Through the years, it has served as a hedge against inflation and

the erosion of major currencies, and thus is an investment well worth considering.

Figure No. 5 : Average annual return of assets

Gold is considered a beneficial asset during periods of uncertainty. Historically, it

generated long-term positive returns in both good times and bad. Over the past decade, the

price of gold has increased by an average 14.1% per year in INR since 1973 after Bretton

Woods collapsed. Gold’s long-term return has been comparable to Indian stocks and higher

than Indian government bonds, also outperforming other major asset classes.

15.58%

7.85%

8.87%

0.15%

-2.67%

-1.63%

11.36%

9.87%

10.53%

7.58%

8.60%

8.81%

9.50%

8.89%

8.70%

7.91%

8.06%

7.81%

-3.00% -1.00% 1.00% 3.00% 5.00% 7.00% 9.00% 11.00% 13.00% 15.00%

2-Yrs

5-Yrs

10-Yrs

Cash GovernmentBonds CorporateBonds Stocks Commodities Gold



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Table No. 4 : 10 years Annual returns

Year Gold Sensex Silver

2010 23.6 17.4 71

2011 31.7 -25.1 8.8

2012 12.1 25.1 12.1

2013 -4.9 8.5 -24.3

2014 -8.2 29.6 -15.6

2015 -6.2 -5 -7.9

2016 11.5 2 19.9

2017 5.2 27.5 -1.5

2018 7.5 5.9 -2.1

2019 24.1 14.1 22.9

Gold investors have reaped slightly better returns than investors in stock market this

decade. BSE Sensex has appreciated by 130% in the last 10 years, but gold has outdone it with

134% returns. Gold touched its peak of Rs 40,280 per 10 grams on 7 September 2019. Sensex,

on the other hand, has constantly hit fresh high and rallied above 40,000 mark in the recent

past. Sensex, in the last 10 years, has largely moved upward barring two years when it gave

negative returns of -25.1% (2011) and -5% (2015). Gold delivered negative returns in three out

of the last ten calendar years. For three consecutive years 2013, 2014 and 2015 gold

gave negative returns of -4.9%, -8.2% and -6.2% respectively to investors.

In absolute terms, if an investor had made a lump sum investment of Rs 1 lakh in Sensex

on January 1, 2010, the returns would now amount to Rs 2,30,918. If an investor had invested

Rs 1 lakh in gold on January 1, 2010, total returns now would be Rs 2,40,000 and if an investor

had invested Rs 1 lakh in silver on January 1, 2010, the returns would now be Rs 1,74,460.

Gold can enhance a portfolio in following key ways:

Improve overall portfolio performance.

Generate long-term returns

Provide liquidity with no credit risk

Act as an effective diversifier and mitigate losses in times of market stress



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Institutional investors have embraced alternatives to traditional stocks and bonds in pursuit of

diversification and higher risk-adjusted returns. The share of non-traditional assets among

global pension funds increased from 7% in 1998 to 26% in 2018

Conclusion

Investing in physical gold like bars, jewellery, and coins, comes with issues like storage,

security, and even liquidity. Further, what investor earn solely depends on the price of gold

rising or falling. So, if investor still want to invest in gold it should only form a small part of

portfolio. Investor with stable and regular income should not put more than 2-5 percent of their

portfolios in the precious metal. And for those who do not have regular income they can put in

not more than 10 percent. Investor should consider paper gold - gold exchange-traded funds,

fund-of-funds, and sovereign bonds - instead of physical gold. These are more cost-effective

and more liquid. Gold’s unique attributes as a scarce, highly liquid and un-correlated asset

highlight that it can act as a genuine diversifier over the long term.

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GOLD AS A TACTICAL LONG -TERM STRATEGIC ASSET