Bond Market Update July 2019

Benchmark 10 Year G-sec bond Yield closed at 6.41% yesterday, falling by 100 bps from the high of 7.4% just two months back. It touched low of 6.25% last week. The yields had scaled a peak of 8.18% on 11 Sept’18. Thereafter, there has been a sustained decline in yields till present with yields falling to an almost 30 months low on 16 July’19. Yields are just 23 bps away from breaching the decadal post demonetization low of 6.18%. On a 15-year period, yields touched 5.24% post the Great Financial Crisis.

What is driving yields lower?

The fall in yields in the recent 2-3 months can be mainly attributed to the following reasons:

  • 3 repo rate cuts undertaken by the RBI and expectations of a further rate cut in August’19.
  • Benign retail inflation and economic growth concerns which supports further rate cuts by RBI.
  • Easing banking system liquidity – The banking system liquidity has significantly eased during June-July’19. In the month of June and July’19, the banking system liquidity has witnessed liquidity surplus for a sustained period.
    • When the banking system liquidity was pressured during FY19, the RBI constantly infused liquidity almost aggregating Rs 3 lakh Crs. into the banking system via OMO purchases.
    • In the first quarter of FY20, Rs. 52,535 Crs. have been infused into the banking system by OMO purchase.
    • Also, RBI infused liquidity aggregating Rs 69,435 Crs. during March-April’19 by undertaking 2 long term rupee dollar swap
  • Announcements in the Union Budget on gross market borrowings and fiscal deficit –
    • Government has lowered the fiscal deficit to GDP ratio to 3.3% of GDP for FY20, 0.1% lower than the ratio budgeted in the Interim Budget.
    • In addition, the gross market borrowings programme of the central government was kept unchanged at Rs. 7.1 lakh Crs. However, the important point to note is 10% of the gross market borrowing i.e almost Rs 70,000 Crs will be by issuance of sovereign bonds by tapping overseas markets which will further reduce domestic supply.
  • Indirect impact of accommodative monetary policy stance by global central banks –
    • On account of concerns surrounding global growth, major central bank across the globe have shifted their stance to a relatively accommodative monetary policy and also plans to cut policy rates to reinvigorate domestic growth.
    • With central banks of advanced economies namely US Fed, ECB, BoE planning to lower interest rates or provide liquidity stimulus have driven treasury yields across countries lower and have indirectly made Indian government securities (G-Sec) an attractive investment alternative.


  • G-sec Yields have cooled off owing to multiple favourable factors at play.
  • However, the corresponding decrease in Corporate Bonds spreads has not played out yet. This is likely to get better with Corporate spreads cooling off in the near-term.
  • The reduction in Corporate spreads will reduce the borrowing cost of corporates and aid in reviving corporate profitability. This could be the next trigger for the bull equity markets.

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Ohh my Gold…!

Part 3: Gold as an investment instrument

There is no doubt about gold being a ‘store of value’ and its role in ‘wealth preservation’. However yet it’s utility as an investment instrument is often questioned but seldom is its utility as portfolio insurance.

Gold price movement since the end of 1969

Gold appreciated at CAGR of 10.18% in past 47 years till Oct’2016. However the rate of appreciation from 1st Mach 2001 to 1st March 2008 was 32% and as the subprime crisis finally unfolded upon us, value of gold doubled in the following 3 years.

Remarkably gold price went up by 18x during hyper inflationary scenario of 1970-80. At the onset of 21st century, George Bush’s ‘housing for all’ resulted in rising inflation in USA this culminated into the worst financial crisis the current working generation has seen. Gold has shown stellar performance in this period as well. The data suggests that as an investment gold will still rank above many fixed income instruments.

Gold and Portfolio Diversification

Diversification calls for investments in different asset classes. An important element in diversification is correlation between different asset classes. An analysis by world gold council concludes near zero correlation between gold and either US equities or US T-bills for past 10 years. Amongst many other investment instruments, EM sovereign debt tops with correlation of just under 0.4 with gold.

From the commodity pack, silver has strong positive correlation with gold, followed by Dow Jones AIG commodity index; the later however will be biased by weights assigned to gold and silver.

Theoretically any asset class which has correlation of less than +1 with other assets or with the portfolio will entail the benefit of diversification.

Based on following graphs it can be concluded that gold will add diversification benefits to a portfolio. However this doesn’t answer the question of how much weight one should assign to gold.

Correlation between gold and other commodities

Weight of gold in a portfolio

People belonging to Austrian School of Economics have a very interesting perspective in this regard. So far it is clear that gold has performed well during the great depression of 1930s which was a deflationary scenario. It has stood up to the test of time during the hyperinflation or stagflation of 1970-80 and also during the crisis of 2008. This emphasizes gold’s importance as an insurance for the portfolio.

During 1930s, US equities saw deterioration of values in the range of 70- 80% whereas gold prices went up by 75%. However in real terms the purchasing power of gold increased by almost 10x due to devaluation of US $. This incidence has founded the basis for 10% asset allocation for gold in a portfolio so as to preserve your purchasing power.

During the hyper inflationary period of 80’s decade, gold went up by 18x and it went up by 7x from 2001 to 1011 the decade marked by sub-prime crisis. It is thus evident that gold can be a good hedge against inflation and it lives up to its reputation as ‘store of value’ during deflation. Unlike many other commodities these movements however, are independent of the demand and supply of gold. These are results of behaviour of masses resorting to gold during panic periods.

This behaviour underlines how current credit fueled monetary system is vulnerable to the sentiment of masses and trust in the central banks globally. Current negative rate scenario is an absurd example of how financial systems are “managing” themselves with the fiat currency. Incidentally just like the fiat currency many other investment instruments are eventually backed by the faith in government’s ability to collect taxes and not any tangible thing that has value.

To fight the financial crisis which is resulted from credit fuelled economy central banks resorted to printing more notes i.e. more liabilities. This may one day eventuate into lack of faith in the fiat currency and collapse of the system as we know of it. With this outlook Austrian School of economics advocates 10% allocation of gold preferably in the physical form as the electronic gold, though backed by reserves is again a mere promise.

Yes! It is a frightening picture of the future but it’s just a possibility and the chances of this happening is a guesswork. The best thing an investor do is forget the risks one has already transferred and work around the risks that one has decided to take.

But Always Invest because “Hope Floats and Cash Flows!”

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Ohh my Gold…!

Part 2: Gold Demand and Supply

Supply side:

The average annual supply of gold is around 4,000 tons over the last 10 years. Gold supply comes from two sources: mining & recycled gold. Total mine supply – which is the sum of mine production and net producer hedging – accounts for two thirds of total supply. Recycled gold accounts for the remaining third.

Mine Production

China was the largest producer in the world in 2015, accounting for around 14 per cent of total production. Asia as a whole produces 23 per cent of all newly-mined gold. Central and South America produce around 17 per cent of the total, with North America supplying around 16 per cent. Around 19 per cent of production comes from Africa and 14 per cent from the Commonwealth Independent State (CIS) region.

Recycled gold

Because gold is virtually indestructible, all the gold ever mined still exists, apart from a small amount which has been lost. At the end of 2015, there were 186,700 tonnes of stocks in existence above ground It is recoverable from most of its uses and capable of being melted down, re-refined and reused.

Recycled gold therefore plays an important part in the dynamics of the gold market. While gold mine production is relatively elastic, the gold recycling industry provides an easily-traded supply of gold when it is needed, thereby helping to stabilize the gold price.

Demand Side:

All over the world, gold has emotional, cultural and financial value, which supports demand across generations. Gold is fashioned into jewellery and used to manage risk in financial portfolios and protect the wealth of nations; it is found in smart phones, and cutting-edge medical diagnostics.

These diverse uses for gold, in jewellery and technology and by central banks and investors, mean that across the decades there is demand for gold from either of the sectors. This self-balancing nature of the gold market means that, typically, there is a sustained base level of demand.


It has always been a dominant area of demand for gold & over the past five years (2011-2015) has accounted for around 50% of world gold demand. India and China are the two largest markets for gold jewellery, together representing over half of global consumer demand in 2015. Gold plays a cultural role in these countries and is bought as a symbol of prosperity on certain auspicious days. Apart from this, under-penetration of other financial products in the society results in investment demand for gold.


Gold has unique qualities that enhance risk management and capital preservation for institutional and private investors across the globe. As discussed previously, a modest allocation to gold makes a valuable contribution to the performance of a portfolio by protecting against downside risk without reducing long term returns. Today, investment in gold accounts for around one third of global demand.  This demand is made up of direct ownership of bars and coins, or indirect ownership via Exchange-Traded Funds (ETFs) and similar products.

Central banks

Since 2010, central banks have been net buyers of gold, and the demand has expanded rapidly from less than two per cent of total world demand in 2010 to 14 per cent in 2014. Some banks have buy gold to diversify their portfolios, especially from US$-denominated assets, with which gold has a strong negative correlation. Others as a hedge against tail risks or because of its inflation-hedging characteristics (gold has a long history of maintaining its purchasing power).


Around 9% of the world demand for gold is for technical applications. Majority is from electronics industry, for manufacturing of high-specification components where gold’s conductivity and resistance to corrosion make it the material of choice. Gold is non-reactive and biologically compatible and hence used extensively in dentistry.

Other industries which use gold include space industry and in fuel cells. Recently, gold has been proven to be commercially viable to be used in catalytic converters driving demand from automotive sector. Advances in nanotechnology warrants for new demand driver for the yellow metal. Healthcare & environmental researchers have found various applications of gold nano particles. Commercial applications of these new technologies will result in increasing demand for gold.

To be continued.. ( Part 3: Gold as an investment instrument)

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Ohh my Gold…!

Part 1: A brief history

Gold is the only currency used in the history of mankind that has intrinsic value. Owing to its physical properties, gold (and silver) has been one of the first investment instruments. Gold is tangible, durable, non-reactive, non-corrosive, ductile and malleable metal. This has allowed division of gold in denominations as small as 0.5 grams. This divisibility is one of the reasons why gold (and silver) was used as currency during medieval time. Apart from ductility and malleability it is a good conductor of electricity due to which it has various industrial applications.

There are various emotional and behavioural aspects to why people want to invest in gold. In India and many other countries, gold is seen as a sign of prosperity. Gold fascinates people from all strata and income groups. Royals, monarchs, kings and rulers all over the world have always resorted to gold to fill up their coffers. Liquidity owing to universal acceptance is also an important property of gold that makes it desirable.

Before August, 1971 when Nixon de-linked US $ from gold, the greenback was supported by gold at a rate fixed by the US government. The events that lead to and after the shift from gold standard to fiat currency are portrait of how a financially engineered economy and currency system may fail. Let us go back in time and understand history of gold.

1920-32– Rate of gold in USA was ~$20 per ounce

1933– $35/ ounce

However, 1929 marked the start of global recession & deflation. This led then US President Franklin D. Roosevelt pass the infamous, historic order 6102 which gave a period of mere 25 days from 5th April to 1st May 1933 for all citizens of USA to exchange their gold coins, bullion and certificates for a fixed sum of $20.67 per ounce. In the following year, the gold exchange rate was revised to $35/ ounce effectively de-valuating the dollar by 40.94%. This is the only event of government confiscation of public gold (although for a price), an effort to fuel inflation that failed miserably and it wasn’t until the Second World War when things started moving again as desired (in terms of inflation).

1944Bretton Woods Agreement– This agreement abolished exchange of gold in international trade for exchange in US$ which was the reserve currency. Each of the currency was pegged against gold based on the amount of gold reserves with the country. IMF was established to monitor interest rates and currency stability whereas World Bank was established to lend reserve currency and facilitate trade. It is estimated that almost 75% of the then declared world gold reserves were with the USA.

1968-73– Some 20 years after the Bretton Woods agreement, countries other than USA were holding more US $ than the US gold reserves. This resulted in risk of lack of confidence and possible run on US $. Eventually the Bretton Woods agreement was abolished and all the world currencies were floated against US$ and countries are now free to choose any exchange agreement. This was the beginning of gold being traded as a commodity.

Present day scenario

Since 43 years the arrangement of fiat currency has survived, albeit for a few major crisis. Fiat money is simply a government approved legal tender used for transactions. This is however not backed by any commodity such as gold but by a promise of the government that issues it. Hence today, a currency is as strong as faith in the government that issues it. Devaluation of currency results in appreciation of gold prices. This is because gold prices are expressed in US$. Hence any weakness in US$ results in rally in gold prices. However this doesn’t mean that gold is comparable to US$ as an investment instrument. US $ is again a fiat currency and is only as strong as the faith in US government which is backed by its ability to impose taxes on US citizens. Hence ultimately a fiat currency is as strong as tax paying ability of citizens in the country of issuance.

To be continued.. (Part 2: Gold Demand and Supply)

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De-compositing Market Returns

NIFTY 50 index is National Stock Exchange of India’s benchmark broad based stock market index for the Indian equity market has delivered 11.24% CAGR since inception. So, while this statement is factually correct many believe that Nifty 50 will deliver 11.24% return year on year (which translates to roughly doubling your penny in 6.5 years’ time frame).

This is one of the biggest misconceptions which many investors have and which leads to disappointment and ultimately makes common investor lose money.

Nifty 50 was launched on April 1st 1996. We have broken down this time periods into smaller periods so as to gain some insights,

  • Firstly, despite having so many topsy-turvy events markets have delivered compounded return in excess of 11% in last 24 years.
  • As seen from the above chart, there are some periods where the Index has delivered massive returns (Recovery post 9/11, India Re-rating period 2004-2008) and some periods where Index have fallen drastically (Global Crisis of 2008, Chinese Economic slowdown).
  • Although, over a period of 24 years Nifty 50 has generated 11.24% CAGR, investors investing at different time frame have earned different returns. For e.g. someone who invested at the peak in 2008 have earned poor return of 5.68% (CAGR) in over 11-year period. On the other hand, if someone who have invested at the bottom of Tech Crash (September 2001) and stayed Invested till date earned a CAGR of 16%.
  • So, it is important from understand that markets work in a cyclical fashion, and knowing where you stand in the cycle is important for investing.
  • To get further insights, we calculated rolling 5-year CAGR returns on a daily basis for Nifty 50. Results are as follows,
  • Out of total 4843 reading (5 year rolling CAGR on daily basis) – on 26.42% of the times Nifty 50 delivered returns more than 15% (Which corresponds to 5-year doubling).
  • Similarly, Nifty delivered more than 8% return (Returns typically delivered by Debt Funds) ~60% of the time.
  • It is also important to note that, Nifty 50 delivered less than 4% return (Less than what saving bank offers) 23% of the times, and have delivered Negative returns on a 5-year period close to 8% of the times.

While investing in equities it is important to have patience and discipline, but it is equally important to have guidance from someone who has been active in equity markets, knows how it functions and can handhold you in testing times.

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Creation Vs. Preservation

Everyone aspires to create wealth…

  • Some create enormous wealth in short span of time, others require little longer time horizon.
  • Some are able to create wealth at a blistering pace, others require patience and persistence.

Generally speaking, if you earn more, spend less and invest you end up creating decent amount of wealth in the medium to long run.

Creating wealth is one part but preserving wealth is an entirely different ball game. You need to have different approach while preserving wealth than the one you had while accumulating wealth.

Wealth creation is the accumulation of assets and income over a stipulated period of time. On the other hand, wealth preservation is the efficient management of all personal assets

Wealth Creation and Wealth Preservation

The Central concept behind wealth creation and preservation is to ensure that, your money doesn’t stay idle and in turn lose its spending power. Products like real estate and equity help in wealth generation, properly employed bonds, Debt Mutual funds, gold and other such securities can help with wealth preservation.

In order to protect your wealth, follow a “spread it as you build it” approach. The strategy is to disperse and diversify your wealth across the aforementioned asset classes and categories.

When you’re distributing your wealth, it’s important to keep the following points in mind:

When markets are on Song and you are making good returns on your investments everything seems good but, when the markets are down, it is important to prioritize your goals until they stabilize or bounce back. At such a time, pay heed to critical goals that can’t wait, such as medical bills or your children’s education. Once you shortlist your critical goals, it’s a good idea to allocate assets for the rest of your goals based on importance and availability. “Don’t put all eggs in the same basket” is a well-known mantra one should follow. Having a “B” Plan is important in ever changing world of investments. You can’t always predict your goals. A sudden turn in events can instantly hamper them. In such a scenario, it is important to have a ready corpus of accumulated wealth for critical goals. Many a time, it is the funds kept aside for non-critical goals that act as a reserve for critical goals. Asset allocation and Rebalancing, evaluate your portfolio every three months. This will help you reorganize your portfolio in case your debt and equity proportions are out of place.

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Do you have the RIGHT insurance?

Insurance to compensate for financial losses started with traders who would seek compensation in the event of loss of goods due to natural disasters, accidents or robbery. Insurance is an instrument to transfer risk that one doesn’t want to bear. The traders were ready to bear risks of business but not of the things beyond their control.

When do you need insurance?

Insurable interest is defined as ‘The financial interest that the assured possesses in whatever is being insured’. In other words, it is the right of a person to insure something which, when lost or damaged, would mean a financial loss.

You need to insure your vehicle and accidental harm caused to third party.

Your & family member’s health in case you incur substantial expenses owing to hospitalization.

Your life to ensure that those who are financially dependent on you continue to receive financial assistance till it is needed. Others can be property and any other assets that are financially valuable.

Common pitfalls in buying insurance

Mixing investments & insurance- Many investors feel ‘stuck’ due to wrong insurance policies being pushed to them. Heavy commissions in these products eat away the gains that investors expect.

Insurance of minors- Agents often insist on insuring children or grandchildren in order to reduce mortality expense. Usually a person is never financially dependent on future generations and hence there is no insurable interest. This gimmick leads to ‘penny wise pound foolish’ decision. 

Not being ready to let go of the premium- especially in life insurance people cannot fathom the fact that the premium becomes an absolute expense if you don’t claim insurance in a given year. Well, being alive for another year is a far bigger reason to be happy! This thought of ‘losing out’ premium leads one to choose a mix of investment and insurance. Such decisions usually lead to either inadequate insurance or excess premium outlay.

What should you do?

Buy pure insurance products such as term insurance for life.

Have adequate health insurance for your family.

Insure your home/property & vehicle.

Certain individuals may have some specific insurance requirement where a financial advisor can help.

Ensure that you have RIGHT insurance!

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