Gold funds deliver high gains on tumbling rupee

In the last five years, while gold prices appreciated 55.8% in dollar terms, in rupee terms, returns stood at 129%, primarily owing to the falling rupee

Lately, investors in gold have been reaping rich gains. Gold funds, including gold exchange-traded funds (ETFs), have delivered high returns, owing to the falling rupee, beating all other categories of mutual funds. According to data by Value Research, in the last fortnight, these funds returned 4.7 per cent, compared to 3.6 per cent returns by technology funds. In the same period, the CNX Nifty fell 1.76 per cent.

Today, the rupee plunged to an all-time low of Rs 58.98/dollar in intra-day trade.

Though globally, gold has been falling due to a strong dollar, the weakness in the rupee has translated into gains for domestic gold investors. International gold prices fell 2.94 per cent in the last fortnight, as the dollar strengthened against major global currencies. Yesterday, Standard & Poor’s withdrew its negative outlook on US debt.

In the last fortnight, while gold prices fell 2.94 per cent globally, domestic prices surged 3.14 per cent; the rupee fell 4.24 per cent. Chirag Mehta, fund manager, Quantum MF, says, “Factors such as a fall in the rupee and a rise in customs duty led to returns. Also, allocation to gold has been good.” In the last five years, while gold prices appreciated 55.8 per cent in dollar terms, in rupee terms, returns stood at 129 per cent, primarily owing to the falling rupee (it fell 37.1 per cent against the dollar in the same period). This boosted domestic returns of gold, compared to global returns.

Recently, the Reserve Bank of India barred banks from importing and selling gold, while the government raised duty on gold from six per cent to eight per cent. While this boosted gold prices domestically, it is expected this would reduce supply, once demand rises. Gold ETFs purchase physical gold, against which these issue mutual fund units. Market sources indicate there is no shortage of physical gold, as retail demand for gold has seen a fall. During the peak demand season, premiums on physical gold could rise, despite jewellers increasing gold stocks. Mehta says, “Gold is available as of now, but during peak times, the premiums on gold could rise.”

While gold has appreciated significantly, investors should avoid using it as a hedge against a falling rupee. Dhirendra Kumar, chief executive, Value Research, says, “Gold is an unproductive asset. To play it purely for currency gains is not such a great idea.”