GOLD AS A PORTFOLIO DIVERSIFICATION TOOL

AGENDA

• Why Commodities?

• My Learning's

• Association With Aditya Birla Money

• Understanding and analysing the Bullions Markets (Gold)

• Conclusion

ADITYA BIRLA FINANCIAL SERVICES POWER HOUSE

ADITYA BIRLA FINANCIAL SERVICES GROUP – COMPANY SNAPSHOT

Mutual Funds

• Ranked Top 5 in the Mutual Funds Industry

• Over Rs.60,000 crores in Average Assets under Management

Insurance

• Ranked Top 5 in the Insurance Industry

Distribution

• Over 4 million customers and 15,000+ employees

• As a distributor, enjoys strong presence through a wide range of

product offerings, including wealth management

ADITYA BIRLA MONEY – COMPANY SNAPSHOT

• Equity, Derivatives & Commodities broking

• Depository services and distribution of third party financial products

• Incorporated in 1995, became part of ABFSG in March 2009

• Pan India presence

• Primarily a retail focused business with larger presence in Tier II &

Tier III cities

• ABML now caters to over 180,000 customers

WEALTH MANAGEMENT DEPARTMENT

Financial Planning

• Identifying your financial goal

• Investment plan

• Portfolio construction

• Portfolio maintenance

• Portfolio review

WHY COMMODITIES?

• Portfolio Diversification - Commodities don’t move exactly the same way & at

the same time as equities do, for example, if equity falls on one day, commodities

may not necessarily fall that day as factors affecting both these markets are

different. For example, buying Infosys & buying Copper – both are completely

unrelated.

• Commodities are less related with each other as fundamentals driving each

commodity is different. Unlike stocks, which are affected by global & domestic

overall sentiments.

• Global in Nature – hence there is less risk for manipulation

• Low Volatility over Equities

• Leverage Effect

WHY COMMODITIES – AN EXAMPLE

• For example, if you Buy 1 contract of Gold (a 1 kg contract);

• Say, current price of Gold for MCX October Contract = Rs.30,000/-10 grams

• Value of 1 Kg Contract = Rs.30 lacs

• Margin Required for Buying 1 Contract = 4% i.e. Rs.1,20,000/-

• Gold Prices move up to Rs.30,500/10 grams

• You make a profit = Rs. 30,500 – Rs. 30,000 = Rs.500 * 100 = Rs. 50,000/-

on an investment of Rs. 1,20,000/-; a return of 41.6% (This return can be in

a single day also).

COMMODITIES – A DIVERSIFICATION TOOL• Commodities don’t move exactly as per

equities markets. Hence risk can be reduced by investing part of your portfolio in commodities.

• Factors effecting commodity markets may not necessarily affect equity markets. Like a strike in copper mine in Chile may lead to copper price rise but may not at all affect the Indian equity markets.

• Looking at the chart, we see that Gold prices touched a high in October 08 when Sensex marked its low during same period.

• If an investor had kept a percentage of his portfolio in commodities also, instead of entire investment in equities at that time, his losses would have been reduced.

COMMODITIES - LOWERING RISK IN PORTFOLIO

• The above table shows Sensex and gold prices during 2008. After the Sensex hit a high in Jan

’08, it hit a low by the end of the year while gold rose.• The above table clearly indicates that if an investors had invested 100% of his portfolio in

equities he would have incurred a loss of 63% on his total investment during 2008. While 20%

of portfolio diversified into gold would have reduced his losses by around 33%.

Asset Class 2004 Sep 2010 % ReturnsSensex 5900 19350 228Gold 5800 19000 228

Yr. 2008 Yr. 2008Sensex 21200(Jan) 7700(Oct) -63.68Gold 10000(Jan) 14300(Oct) 43.00100% investment in Sensex -63.6880% in Sensex and 20% in Gold -42.34

FUTURE OF COMMODITIES

CommoditiesSize of Physical Market

Conservative Multiplier ( In 3 years)

Global Multiplier(In 3 – 5 Years)

Gold & Silver Rs. 43000 cr 20 TimesRs. 8,30,000 cr

50 TimesRs. 21,50,000 cr

Edible Oils Rs. 30000 cr 10 TimesRs. 3,00,000 cr

20 TimesRs. 6,00,000 cr

Metals Rs.11000 cr 10 TimesRs. 1,10,000 cr

20 TimesRs. 2,20,000 cr

Total Rs. 84,000 cr Rs. 12,40,000cr Rs. 29,70,000cr

COMMODITIES- LESS RELATED WITH EACH OTHER

• Commodities are less related not only with other asset classes like stock, real estate, etc but have a lower relation with each other as well.

• For example a fire in crude refinery unit may lead to increase in crude oil prices, but may not impact other commodities like gold, copper etc.

• Similarly the arrival of festival season may be bullish for precious metals but not for crude oil or copper or rubber.

• Hence each commodity has its own unique fundamental price drivers.

• This allows investors to take positions in various commodities simultaneously as one factor/event will not affect all commodities equally, leading to diversified lower risk trading in commodities.

SEASONAL PATTERN OF DIFFERENT COMMODITIES IS DIFFERENT

• Gold Seasonal Chart is different from copper as factors affecting both

metals are different.

• Hence investors get an opportunity to invest any time during the year

in various commodities since the price trend of different commodities

differs from each other during a particular period.

• Like copper is normally bullish during 1st quarter of a year while

gold peaks during last quarter of a year.

COMMODITIES – A GLOBAL PROPOSITION• Entire world trades in commodities. All

industry sectors, Governmental organizations, Central Banks, Commodity funds to the common man, are affected by commodity in their daily lives.

• Due to their global nature, manipulation is difficult in commodities unlike equities where a set of investors can move a stock; like KP 10 Stocks during Ketan Parikh heydays.

• Commodity movements can be explained unlike equity movements where it is difficult to site a proper reason for a stock movement. For example, if Satyam stock moves by 5% in a day, exact reason would be difficult to find.

• But it is easier to give a proper logical reason for most of the international commodities like gold, copper, crude etc.

COMMODITIES – LOW ON VOLATILITY OVER EQUITIES

• Historically commodities have been less volatile compared with equity markets.

• Hence commodities as a part of portfolio will give a balance affect to the overall risk adjusted returns.

• Low volatility means lower margins, hence higher leverage in Commodities.

COMMODITIES – UNIQUE TRADING ADVANTAGES

• Commodities provide unique advantages of trading late night which is not possible in other markets.

• An investor thus has the option to trade even from home and after his work hours. Attend office during the day and trade during night.

• Updating oneself on commodities is easy as factors affecting prices are few when compared to stocks.

• Few commodities to trade, hence tracking makes easy. Further, commodities are clubbed in categories :

• Bullion – Gold / Silver;

• Base Metals – Copper / Zinc / Nickel / Aluminium / Lead / Tin;

• Energy – Crude Oil / Natural Gas.

This makes further analysis easy.

FUNDAMENTALS INFLUENCING COMMODITIES

• Demand & Supply

• Seasonal patterns

• Global & Indian economic data / policies

• Weather conditions

• Import / export parity and government policies

• Forex / currency movement

• Global political / economic events and data

• Global Hedge / Commodity Fund Activity

• US / Euro-Zone / China / Japan – Key Data Releases & Central Banks Statements

GOLDEN RULES OF TRADING

• Always trade with Strict Stop-loss

• Don’t risk more than 5% of corpus on any one trade

• Trade with the TREND

• Do not trade on HOPE. Hope is good for in life but not in markets

• Taking small profits and letting losses run is based on fear and hope. This every trader will have to find a way to deal with

• Do not increase your commitment with success. Overconfidence can be very dangerous in markets

GENERAL CONCERNS OF INVESTORS

• Higher Leverage generally attracts the trader to take extremely high leverage positions. Any adverse price movement will have a significant impact on portfolio. While at the same time, any positive price movement will lead to a windfall.

• For example, if copper prices fall by Rs.5 per kg, it will give a multiplier effect of total loss of Rs.5000 per contract. So if any investor is holding 10 long position, he will incur a Rs.50,000 loss. This could lead to wiping of margins if an investor holds his position without stop loss & market continues to move against him.

• Hence investors feel jittery thinking that commodities lead to losses without realizing the effect of leverage. The same is applicable while trading equities as well.

• Disciplined trading by putting stop losses on positions is the way to trade profitably.

COMPANY’S RESEARCH CAPABILITIES

• Daily Fundamental & Technical Reports covering major commodities

– analyzing global trends, major news events; key data releases and a

technical perspective as well.

• Provide intraday and positional trading calls with a strike rate of 65%

- 70% on major commodities such as gold / silver / copper / crude/

soybean / guarseed / chana, to name a few.

• Publish in-depth special monthly reports on Gold / Silver aimed at

educating the investors on global happenings, to help them take

advantage of price moves.

ASSOCIATION WITH ADITYA BIRLA MONEY

• Revenue Sharing…

• Trip To Abroad…

• Honors Party…

• No Cost Involved…

• 100% Assistance From Service Team…

• Best Research & Asset Management Team…

• Sound Past Track Record…

OBJECTIVES

• Understanding and analysing the Bullions Markets (Gold)

• Preparing the presentations for new and old clients

• Monitoring the progress of new recruits for bringing in more

business for the company

UNDERSTANDING AND ANALYSING THE BULLIONS MARKETS (GOLD)

• Extensive study of the bullion markets with respect to gold

• Micro and Macro level perspectives

• Analysis of the movement of Indian Gold Prices vis-à-vis Major

Global Stock indices

FIVE KEY FACTORS AFFECT THE PRICE OF GOLD

• Value of US dollar

• Jewellery demand from Asian markets and Chinese

• Central banks

• Gold production

• Increased investment in gold

GOLD PRICES (INDIA) VIS-A-VIS NYSE

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 1011051091131171211251291331371410.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

NYSE (US)

GOLD (INR/ 10g)

GOLD PRICES (INDIA) VIS-A-VIS NYSE

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101 105 109 113 117 121 125 129 133 137 141

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

NYSE -Gold -

Both the series show the correlation up to an extent of 0.2872

NYSE VIS-À-VIS BSE SENSEX

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 1011051091131171211251291331371410.00

5000.00

10000.00

15000.00

20000.00

25000.00

NYSE (US)BSE (INDIA)

NYSE VIS-À-VIS BSE SENSEX

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101105109113117121125129133137141

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

BSE -NYSE -

Two stock markets are related to an extent of 0.6643

GOLD PRICES VIS-À-VIS BSE SENSEX

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101 105 109 113 117 121 125 129 133 137 1410.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

Indian Gold Prices (in Rs. Per 10g)

SENSEX (BSE INDIA)

GOLD PRICES VIS-À-VIS BSE SENSEX

The coefficient of correlation between two series comes out to be 0.8229

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101 105 109 113 117 121 125 129 133 137 141

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

BSE -Gold -

ANALYSIS OF GOLD FOR LONG TERM INVESTMENT

GOLD VS. INFLATION

Year* Gold Price** YoY Return on Gold Initial Investment

return on Gold

2005 7488.77 - -

2006 9038.72 20.70% 20.70%

2007 10185.96 12.69% 36.02%

2008 12764.07 25.31% 70.44%

2009 17013.56 33.29% 127.19%

2010 20196.08 18.71% 169.69%

2011 27790.15 37.60% 271.09%

GOLD VS. INFLATION

Year* Gold Prices** YoY Return

on Gold

Initial Investment

Return on Gold

Inflation In

India(CPI)

2006 8263.74 - - 5.79%

2007 9612.34 16.32% 16.32% 6.39%

2008 11475.02 19.38% 38.86% 8.32%

2009 14888.82 29.75% 80.17% 10.83%

2010 18604.82 24.96% 125.14% 12.11%

2011 23993.12 28.96% 190.34% 8.87%

GOLD VIS-À-VIS ` - $ EXCHANGE RATE

2005 2006 2007 2008 2009 2010 20110.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

0

10

20

30

40

50

60

USD-INR

Gold

GOLD VIS-À-VIS ` - $ EXCHANGE RATE

Year* INR-USD Exchange

Rate

YoY Return on

USD

Initial Investment

Return on USD

2005 45.05  - -

2006 44.11 -2.09% -2.09%

2007 39.43 -10.61% -12.48%

2008 47.59 20.69% 5.64%

2009 46.41 -2.48% 3.02%

2010 44.57 -3.96% -1.07%

2011 53.05 19.03% 17.76%

GOLD VIS-À-VIS ` - $ EXCHANGE RATE

Year Gold

Prices

YoY

Return

on

Gold

Initial

Investment

Return on Gold

INR-$

Exchange

Rate

YoY Return

on $

Initial

Investment

2006 8263.74 - - 44.58    

2007 9612.34 16.32% 16.32% 41.77 -6.30% -6.30%

2008 11475.02 19.38% 38.86% 43.51 4.17% -2.40%

2009 14888.82 29.75% 80.17% 47.00 8.02% 5.43%

2010 18604.82 24.96% 125.14% 45.49 -3.21% 2.04%

2011 23993.12 28.96% 190.34% 48.81 7.30% 9.49%

GOLD VIS-A-VIS SILVER

2005 2006 2007 2008 2009 2010 20110.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

0

200

400

600

800

1000

1200

1400

1600

1800

GoldSilver

GOLD VIS-A-VIS SILVER

Year* Silver** YoY Return on

Silver

Initial Investment

Return on Silver

2005 396.65   -

2006 593.56 49.64% 49.64%

2007 564.48 -4.90% 42.31%

2008 501.82 -11.10% 26.51%

2009 822.77 63.96% 107.43%

2010 1326.77 61.26% 234.49%

2011 1586.19 19.55% 299.90%

GOLD VIS-A-VIS SILVER

Year Gold Price YoY

Return on

Gold

Initial

Investment

Return on

Gold

Silver

Price

YoY

Return

on Silver

Initial

Investment

Return on

Silver

2006 8263.74 - - 495.11 - -

2007 9612.34 16.32% 16.32% 579.02 16.95% 16.95%

2008 11475.02 19.38% 38.86% 533.15 -7.92% 7.68%

2009 14888.82 29.75% 80.17% 662.30 24.22% 33.77%

2010 18604.82 24.96% 125.14% 1074.77 62.28% 117.08%

2011 23993.12 28.96% 190.34% 1456.48 35.52% 194.18%

GOLD VIS-A-VIS COPPER

2005 2006 2007 2008 2009 2010 20110.00

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

300,000.00

350,000.00

400,000.00

450,000.00

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

Copper

Gold

GOLD VIS-A-VIS COPPER

Year* Copper Prices** YoY Return on

Copper

Initial Investment Return

on Copper

2005 208978.50 - -

2006 298201.80 42.69% 42.69%

2007 261516.40 -12.30% 25.14%

2008 151038.00 -42.25% -27.73%

2009 325336.60 115.40% 55.68%

2010 413425.10 27.08% 97.83%

2011 397915.00 -3.75% 90.41%

GOLD VIS-A-VIS COPPER

Year

*

Gold

Prices**

YoY

Return

on Gold

Initial

Investment

Return on Gold

Copper

Prices**

*

YoY Return on

Copper

Initial

Investment

Return on

Copper

2006 8263.74 - - 8446.49 - -

2007 9612.34 16.32% 16.32% 9439.67 11.76% 11.76%

2008 11475.02 19.38% 38.86% 7748.69 -17.91% -8.26%

2009 14888.82 29.75% 80.17% 6471.01 -16.49% -23.39%

2010 18604.82 24.96% 125.14% 7574.49 17.05% -10.32%

2011 23993.12 28.96% 190.34% 7720.53 1.93% -8.59%

GOLD VIS-A-VIS NYSE STOCK INDEX

2005 2006 2007 2008 2009 2010 20110.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

Gold

NYSE

GOLD VIS-A-VIS NYSE STOCK INDEX

Year* NYSE Stock

index

YoY Return on

NYSE

Initial Investment Return

on NYSE

2005 7753.95 - -

2006 9139.02 17.86% 17.86%

2007 9740.32 6.58% 25.62%

2008 5757.05 -40.89% -25.75%

2009 7184.96 24.80% -7.34%

2010 7964.02 10.84% 2.71%

2011 7477.03 -6.11% -3.57%

GOLD VIS-A-VIS NYSE STOCK INDEX

Year* Gold

Prices**

YoY

Return on

Gold

Initial

Investment

Return on

Gold

NYSE

Stock

Index

YoY

Return on

NYSE

Initial

Investment

Return on

NYSE

2006 8263.74 - - 8446.49 - -

2007 9612.34 16.32% 16.32% 9439.67 11.76% 11.76%

2008 11475.02 19.38% 38.86% 7748.69 -17.91% -8.26%

2009 14888.82 29.75% 80.17% 6471.01 -16.49% -23.39%

2010 18604.82 24.96% 125.14% 7574.49 17.05% -10.32%

2011 23993.12 28.96% 190.34% 7720.53 1.93% -8.59%

GOLD VIS-A-VIS BSE

Year* BSE Stock

Index

YoY Returns on

BSE

Initial Investment Returns

on BSE

2005 9397.93  - -

2006 13786.91 46.70% 46.70%

2007 20286.99 47.15% 115.87%

2008 9647.31 -52.45% 2.65%

2009 17464.81 81.03% 85.84%

2010 20509.09 17.43% 118.23%

2011 15454.92 -24.64% 64.45%

GOLD VIS-A-VIS BSE

2005 2006 2007 2008 2009 2010 20110.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

Gold

BSE

GOLD VIS-A-VIS BSE

Year* Gold

Price**

YoY

Return on

Gold

Initial

Investment

Return on Gold

BSE

Stock

Index

YoY

Return on

BSE

Initial

Investment

Return on

BSE

2006 8263.74 - - 11592.42  - - 

2007 9612.34 16.32% 16.32% 17036.95 46.97% 46.97%

2008 11475.02 19.38% 38.86% 14967.15 -12.15% 29.11%

2009 14888.82 29.75% 80.17% 13556.06 -9.43% 16.94%

2010 18604.82 24.96% 125.14% 18986.95 40.06% 63.79%

2011 23993.12 28.96% 190.34% 17982.01 -5.29% 55.12%

CONCLUSION

Year Return

on Gold

Inflation in

Indian

Economy

USD-INR

Exchange

Rate

Return

on

Silver

Return

Copper

Return

NYSE Index

Return on

BSE Index

2007 16.32% 6.39% -6.30% 16.95% 10.36% 11.76% 46.97%

2008 19.38% 8.32% 4.17% -7.92% -26.29% -17.91% -12.15%

2009 29.75% 10.83% 8.02% 24.22% 15.47% -16.49% -9.43%

2010 24.96% 12.11% -3.21% 62.28% 55.08% 17.05% 40.06%

2011 28.96% 8.87% 7.30% 35.52% 9.82% 1.93% -5.29%

CONCLUSION

• Gold is the only asset which has never given out negative returns

over past 5 year despite tough economic conditions. It has also been

successful in taming inflation and give out better returns when

compared to other options available in market.

• Even one on one comparison with other available options gives an

edge to the gold as a perfect investment avenue which almost assures

great returns with minimal risks associated.

THANK YOU!!!!!