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.

Jewellery

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.

Investment

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).

Technology

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)

Visit us at https://www.wealthmanagersindia.com/

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!

Visit us at https://www.wealthmanagersindia.com/

Success formula for Investing

As novice investors, many of us are fascinated by successful Investors. We want to invest in next big idea, the best fund or in some strategy which will yield us an extraordinary return. We start searching the internet and right from Warren Buffett to Porinju we see people who have made big money in the capital markets and try and replicate their success formula.

What is Important is Understanding why, what, where, how?

As a novice investor one needs to understand why is he/she is investing? What is the time horizon? Where is one investing? What suits one’s personality? How one should plan and execute? And many more.

Capital markets is a dynamic place which is influenced by hundreds of factors every second. There are tens of asset classes, thousands of products to choose from. Every asset class has different characteristics and provides good/bad returns in different time frames.

“Understanding cycles and having the emotional and financial wherewithal needed to live through them is an essential ingredient in investment success”


Howard Marks

But again not everyone can do it successfully and mistakes have big costs.

Important thing to understand is, generally many of us are not full-time investors and we need professionals to guide us through market volatility. This said, there are some basis rules which can help you make money successfully.

Basic framework for successful investing

  1. Identifying Time Horizon for Different Needs and Investing Accordingly – Identifying Short, medium and long term needs and allocate money accordingly.
  2. Following Asset Allocation Discipline – Not putting all eggs in the same basket, and more importantly reducing exposure in particular asset class when it is overheated and investing in an asset class when it is underappreciated helps.
  3. Determining What Investment Strategy Works for You – Understanding what strategy suits your personality or in other words, matching your ability to take risk with your willingness to take risk is important. Investing in something which causes sleep loss at night is not at all worthy. 
  4. Emotional Discipline – To be a successful investor you need to have emotional discipline. Behavioural biases erode wealth big time, you need hand-holding by someone who understands these biases and will guide you to the right path.
  5. Be Willing to Learn – The market is hard to predict, but one thing is certain: it will be volatile. Learning to be a successful investor is a gradual process and the investment journey is typically a long one. At times, the market will prove you wrong. Acknowledge that and learn from your mistakes.

Happy Investing !