crisis, quantitative easing in the US and
inflationary pressures in the emerging markets drove investors to gold
- In the long term, the supply
mines is expected to be
- A bit of correction is
expected in gold
at present but gold to reach
new highs again in the year 2011.
- The fund is fully invested in
silver stocks and will
continue to maintain a similar portfolio in the year 2011.
Drivers of Gold
- In the
year 2010 it was the sovereign debt
crisis in Europe with
Greece and Ireland getting bailed out. There was a serious financial
which was driving investors to gold.
- The US
economy was finding it difficult
to get back on track with
unemployment at an alarming rate. So Fed continued with its monetary
Quantitative Easing, printing money to buy US treasuries.
The Fed was trying to
monetize the debt, which went against the US dollar and led to
pressures driving people to buy gold as a hedge.
- The inflationary pressures across the
emerging markets like India,
China, Russia and Latin America were driving investors to gold. In fact
imported around 200 tons of gold in the year 2010 which was a huge
over the year 2009.
Foster highlighted that supply from
gold mines has been stagnant
in last few years. Although the year 2010 was a record year for gold
it was in a limited range so he expects gold mines supply to be
stagnant in a
- Another source of supply is gold scrap
which is coming in the market
with high gold prices in the last several years; however the supply of
scrap in 2010 was lower as compared to the previous year. So there is a
declining trend in gold scrap coming to the market.
Classification in 2010
- The fabrication demand which is mainly
for jewellery was stronger in
the year 2010 than in 2009. Usually jewellery demand weakens when gold
are high but the overall demand for jewellery in 2010 improved which
positive for gold.
- There was continued increase in demand
among the central banks; the
central banks in Europe were not selling. They seem to have sold as
they would like to sell and have not been in the market for last couple
years to any significant degree.
- There was also a growing demand among
the central banks of emerging
markets like Russia, India, China and many other smaller countries,
been adding gold to their foreign reserves. This overall growing demand
the central banks was another positive for the gold market.
- Investment was the biggest driver of
gold demand. Issues like the
sovereign debt crisis, quantitative easing and the emerging market
were feeding into the investment demand. We therefore witnessed a
demand for coins, bars, Gold ETFs and also speculation in futures
was reaching new highs.
Outlook for 2011
Foster said that many of these drivers which were in place in 2010
2011 as well. He continues to believe that the sovereign debt crisis is
going away and there seems to be no resolution. Countries like Greece
Ireland need to default on their debts and if they default it will
result in a
banking crisis. The sovereign debt issue will remain with us unless
a permanent resolution, which looks difficult.
is still in a difficult shape; the housing market in the US is still in
depression and it looks difficult for the US economy to get back on
there is a turnaround in the Housing market. Another issue in the US is
finances among state government and municipalities; they are having a
time servicing their pension and healthcare mandate. Many states are
essentially bankrupt. They owe more than they take in and this will
stress on the economy.
markets, two countries like India and China are taking steps to curb
but it remains to be seen whether those efforts will turn out to be
Crude oil is over $90/ barrel and some grains are at record high
overall there remains immense stress in the financial market coupled
with a lot
of imbalances in the global economy. He adds that it is a tricky
where on one hand you have countries like Japan, US and Europe fighting
deflationary pressures and emerging market countries on the other hand
inflationary pressures. So there is a lot of friction and stress and
continue to drive industries to gold as an alternative currency and as
Foster was of the view that, we are in the middle of a bit of
correction in the
gold market. We have not witnessed a good start to the year 2011, gold
about $70 from its highs and the gold stocks are down 10% so far this
are in the midst of a correction mainly for two reasons.
- The profit booking that is taking place
owing to the steep rise in
prices we witnessed from August 2010 to December 2010.
- The general market in the US has a very
healthy outlook for the year
2011. The mood in the US is that quantitative easing will help the
back on track.
Mr. Foster did
not seem to agree with the outlook but at the same time added that
have started taking profits out of gold and are investing in other
that remains the current source of correction in the gold market. He
to believe that there are many risks and as we move forward these risks
come to the forefront and drive the investors back to gold market
raising the prices again. Once we get through this current
will see gold reaching new highs again.
Gold Equity Fund – the feeder fund for AIG World Gold Fund
fund is fully invested in gold and silver
stocks. The main drivers of the fund’s performance in 2010
were the following:
- The fund invested 30% of its corpus in
junior gold mining stocks
throughout 2010.The juniors outperformed last year and currently form
the fund. The fund house believes that in the long term in gold market
will continue to remain fully invested and will have the same
- The other driver was successful Merger
and Acquisition strategies.
The fund lost 8 of its companies to merger and acquisition activities.
these companies were acquired at a premium their Merger and Acquisition
positive for the fund.
- The fund invested 14% of its corpus in
silver stock last year; silver
performed well last year and silver stocks too did well. The fund has
their portfolio in a similar position in the year 2011.
In this year, as far as the gold
companies are concerned Mr. Joseph
expects a good performance across the larger producers. These companies
Kinross Gold Corp and New Mart have not been performing given the
gold prices. However at these gold prices these companies are expected
generate tremendous cash flows. Their bottom line profitability, their
on equity and other investments, etc., should make this industry look
attractive. So he believes that at some point this industry should
profitable and hopefully that should get reflected in the share prices