GOLD as an asset class . Gold and India In 2009, total Indian gold demand touched USD 19bn = 15% of global market Over last decade, value.

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GOLD

as an asset class

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Gold and India

In 2009, total Indian gold demand touched USD 19bn = 15% of global market

Over last decade, value of gold demand in India has increased @13% per year

Currently India and China together account for 25% of annual gold demand

Foundation asset in Indian household – jewellery and investment

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Gold and India

Savings rate estimated @ 30%Around 10% in invested in gold

Traditional division between jewellery and investment overlapDuring H1CY10 Indian net retail investment in gold

has increased by 264% to 93 tonnes (25% of India’s gold demand)Individual’s purchases of coins and bars

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75%

23%

2% Consumption

Gold jewelleryInvestmentDecorative and Industrial

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GOLD IMPORTS

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Currently produces 0.5% of it’s annual consumption

Between 1992 and 2009: Value of annual gold imports has risen by 1,015%Gold imports rose from ` 88 bn to ` 881 bn

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Reasons for investing

Diversification Hedge against inflation Volatililty (over the last 5 years)

Sensex – 27%BSE 500 – 30%BSE Metal – 46%Gold – 23%

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Reasons for investing

Better returns in shorter periods (over last 5 yrs ending Sept 30 , 2010)Gold – 37%Sensex – 1%

Safe haven US Dollar hedge

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In risk management and portfolio theory it is not only individual volatilities that matter it is also how assets interact with each other, i.e., their correlation structure

Gold tends to have little correlation with many asset classes strong viable choice for portfolio diversification

Some are peculiar to the gold market, underpinning its lack of correlation to other assets. These include: fashion trends, marketing campaigns, the Indian wedding season, religious festivals, gold mine exploration spending, new discoveries of gold, the cost of finding and mining gold, and central banks’ strategic reserve decisions.

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Gold avenues

Physical gold Gold ETF Gold mutual funds (FoFs) E-Gold through NSEL India Post gold retail program Gold-linked microfinance scheme Gold through commodities exchange

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Gold ETF vs E-Gold

Gold ETF an exchange traded mutual

fund scheme it does not necessarily hold

physical gold stock at its fullest

cannot be redeemed for physical gold

No exchange possible

E-Gold physical gold held in

dematerialized form which can be traded electronically at NSEL

a digital gold currency that allows you to trade

redeem physical gold from your demat account

retail investors can soon exchange their e-Gold units issued by NSEL with selected jewellery outlets, in the form of jewellery

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Gold ETF vs E-Gold

Gold ETF Tradable only during market

hours intends to mirror gold

prices. Charges - around 1%-1.5%

per annum Only Gold ETFs at present

E-Gold E-Gold is tradable for longer

hours (1000 hrs to 2330 hrs) spot rates of gold no custody charges Gold, silver, zinc and copper

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Categories 3 yr CAGR 5 yr CAGR 10 yr CAGR

Gold 24.34 21.90 17.84

Equity funds -0.23 16.33 22.78

Gilt funds 7.33 6.79 9.23

Debt funds 7.04 6.91 7.80

Figures as on Dec. 31, 2010 Source: CRISIL

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Price of gold over the years (in `)

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Source: RBI

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INTERESTING FACTSIndian context

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Returns over the last 36 years

5% plus in the last 24 years

7% in the last 20 years

16% plus in the last 11 years

33 years of positive returns y-o-y

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Returns over the last 36 years

3 years of negative return1992

India Economic Crisis Sensex went down from a high of 4546 to close the year at

2615 Gold gave a return of -2%

1997-98Asian Financial Crisis Sensex went down in the same period after touching a high of

4605 to close 1998 at 3055 levelsGold gave a negative return of -14% in 1997 and -1.8% in 1998

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Largest producer of gold –China (almost a tenth of world’s supply)

By 2014, China will overtake India as the largest user of gold

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The gold supply is limited:all the gold ever mined would fit into a storage

room about 55 feet long, 55 feet tall and 55 feet wide

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VIEWS ON GOLDFor 2011

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10 years of consecutive rise 25% rise in 2010 Expect trend to continue in 2011

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Combination of factors which encourages a high price for gold:safe haven in the face of a very delicate global

economic situationuncertainty generated in the European financial

systemweakness of the dollar growth in inflation in Asian countries and emerging

marketsexcess of liquidity in the USA

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Jim Rogers, the commodities investment guru:gold will continue to rise over the next decade,

although it may fall off before it reaches historical values adjusted for inflation

Swiss private bank, Sarasin: the price of gold over recent months has been

mainly driven by investment demand. This is principally reflected by the growing quantities of gold held in exchange-traded funds (ETF)

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German newspaper Handelsblat:central banks have moved from being sellers to

buyers of this metal and this is an unequivocal signal about the safest place for investors

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GOLD ETF

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Gold ETF

Pros Investments can be made in

small amounts Safety and security Easy to transact Cheaper than investing in

physical gold Transparency of prices Lower cost of holding

Cons Need to be computer savvy No possibility of doing a SIP Liquidity could be an issue

in case of emergencies

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PHYSICAL GOLD

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Physical gold

Pros Can be purchased from any

bank or jeweller ‘Feel’ the product Can be sold back to jeweller Can be purchased in cash Used for ‘storage’ of

unaccounted money

Cons Cannot be sold back to a

bank Security Guarantee of quality High cost at time of

purchase and sale High cost of storage

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GOLD FUND OF FUNDS

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Gold FoFs

Pros SIP/STP/SWP is possible Good for small investors -

start with amounts of as low as ` 100 or ` 500

No demat account is required

Cons Higher costs than ETFs Minimum annual cost of

1.5% p.a. Gold mining fund FoFs track

the prices of the mining companies and not the price of gold

Exit load of 2% in year 1

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E-GOLD

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E-gold

Pros Seamless entry and exit Safety and security Zero holding cost Convertibility into physical

gold (takes 3-4 days) Working on conversion of e-

gold in demat directly into jewellery items

Cons Capital Gains – 3 yrs Still very new in India.

Downsides are still not known

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TAXATION

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Varies according to investment route Treated as a ‘capital asset’

Liable for capital gains tax Tax treatment similar to a debt fund

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Type Holding period Taxation

Physical gold

STCG Less than 3 yrs Gains added to income and taxed as per individual’s slab

LTCG More than 3 yrs 20% with indexation + 3% education cess

Post DTC Gains added to income and taxed as per individual’s slab; for LTCG indexation benefit applicable

Gold ETFs

STCG Less than 1 yr Gains added to income and taxed as per individual’s slab

LTCG More than 1 yr 10% without indexation or 20% with indexation (whichever is less) + 3% education cess

Post DTC Gains added to income and taxed as per individual’s slab

Source: Outlook Money

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Type Holding period Taxation

Gold FoFs

STCG Less than 1 yr Gains added to income and taxed as per individual’s slab

LTCG More than 1 yr 20% with indexation + 3% education cess

Post DTC

Gains added to income and taxed as per individual’s slab; for LTCG indexation benefit applicable

Source: Outlook Money

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GOLD IN FINANCIAL PLANNING

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Important part of asset allocationjust after the 9/11 terror attacks in the US, while

both stock markets and bond markets crashed across the world, gold held steady and, in fact, rose on that day by 6%

during the financial crisis in 2008, gold prices increased by 28% while the S&P CNX Nifty (Nifty) declined by 51% during the year

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Idea is to use it as a ‘defensive’ asset class Good for managing risk in a portfolio Gold market is highly liquid and many gold

bullion investments have neither credit nor counterparty risk

Should ideally be in the region of 5%. 10% tops

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Strong case for gold to be allocated as an asset class on its own meritspart commoditypart luxury consumption goodpart financial asset its price does not always behave like other asset

classes and especially not other commodities

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STUDY

David Ranson of Wainwright Economics (in Oregon)(Source: The Economist – Aug 4, 2010)

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Gold along with corporate bond spreads, as the key

Gold is the best indicator of future inflation Corporate bond spreads are a predictor of

economic growth when spreads are falling, the economy is

improving, and when spreads are widening, the economy is deteriorating

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Gold down, spreads down This indicates a period of disinflationary growth, so buy equities.

Gold down, spreads up This indicates a weakening economy with disinflation, so buy

government bonds. Gold up, spreads down

This indicates inflationary growth, so buy commodities (an equally-weighted basket of the five components in the Goldman Sachs Commodities Index: energy, industrial metals, precious metals, agriculture and livestock)

Gold up, spreads up Growth is decelerating and inflation is accelerating, so buy gold.

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Thank you for your time