TRUST GOLD TO BE THE WINNING INGREDIENT IN PAKISTANI INVESTMENT PORTFOLIO
SABIKA KHAN & SAMRA SHAH
Dec 3 - 9, 2012
The financial investment market of Pakistan is changing dynamically. Ten years ago, the financial arena of Pakistan was limited to traditional investments like stocks, property and fixed income securities. With the passage of time and evolution of the global financial markets, a need for alternative investment opportunities grew in Pakistan. As we witnessed since then, this market has grown with leaps and bounds and is deemed to be one of the fastest growing industries in South Asia. A reason for this growth has been globally deteriorating conditions as well as that of our nation, which has led financial providers and investors to create alternative investment options that can provide a better safety bracket in times of crisis. One of these alternative ways is investment and trading of Gold.
Most of us, in one way or the other, have heard and discussed the hype and rising prices of Gold. In the simplest terms, Gold gave a ravishing 897% returns over the last ten years from Rs. 6280 per tola in 2002 to Rs.62600 per tola in 2012. It is very interesting to note that a recent article, "Institutional investors likely to diversify to shares, property" by Salman Siddiqui published in The News, misled the general public and potential investors into thinking that Gold is not providing competitive returns. It is interesting because Gold has outperformed most of other investments like stocks, bonds, currencies in the past ten years and remains one of the key components of a balanced portfolio.
Investors all around the world tend to balance risk and return in their portfolio. Gold comes off as an important part of this process. If the portfolio partly contains tangible assets like Gold, where the government and corporations are not the only ones liable to pay, then returns are not primarily based on financial markets and liability payments. This increases the portfolio's stability, as risks and returns are optimized. Especially in Pakistan, with the political instability and uncertain circumstances, Gold has proven to be an excellent store of wealth. Safdar Ahmed, a 34-year old Pakistani agriculturist agrees, "At one point of time, I try to have at least 20% of my net worth, if not more in Gold. Gold is a global market, which is not affected by any situation in Pakistan and is therefore an excellent hedge against other investments. Considering the state of our nation, I won't be surprised to see another 2008 (stock market) crisis. I suffered huge losses during that time! By keeping Gold in my portfolio, I will hopefully be able to reduce the negative impact of any other similar situation."
Since the subprime mortgage crisis, investment in property has no longer been considered safe worldwide. US suffered the most impact of the crisis but since it is the biggest consumer market in the world, the crunch had a ripple effect globally. Moreover, investors have pushed down the prices of property psychologically, even in Pakistan. Property also does not provide the type of liquidity offered by Gold and holding cash. However, by holding cash, the investor is actually losing money. "In simple terms, there are very real reasons for Gold's superior performance over the past decade. The global economic slowdown and excessive money printing has been the ideal environment for Gold to flourish as investors seek safe havens and diversification in troubling times. These conditions still exist today," says Mustafa Sattar, Vice President, KASB securities. "As such, it is essential that investors allocate a percentage of their funds to Gold. This is of particular importance for Pakistani's given inflation."
In Pakistan, government bonds and certificates form a significant part of a portfolio. Although the returns are very low, they are compensated by providing the perceived safe haven status to investors. Saad Rafi, Head of Commodities, AKD Securities says, "Government bonds are not even the safe haven that they used to be. Governments have accumulated so much debt that they are having difficulty +paying it back. We have the classic Euro Crisis, in which many Euro area government bonds have been labeled as junk by the International Community. Risk management has become a very important part of investment and owning at least some percentage of gold provides investors with the hedge that is needed." With all of these investments' state, Gold seems to be an even more lucrative investment, but diversification remains the key to a successful portfolio.
In Pakistan, the value of Gold is much more than investment and price gains. The conventional value of Gold talks about beauty and exclusivity. "I love making Gold jewelry," exclaims 63-years old housewife Mrs. Fatima Haq. "It has become an expensive hobby now, but it has been proven useful because giving four daughters separate dowries is not an easy task. Gold was less than Rs. 8000 per tola ten years ago and now look at the price!"
Unfortunately this perception has also limited the investment avenue of Gold in Pakistan. Gold is seen more as a mandatory item to be giving in a Girl's dowry, rather than investment. It is almost exclusively for decorative and beautification purposes. Very few people buy Gold as an investment and hence the idea of Gold is inclined more towards jewelry and hoarding than actual investment. "The gold jewelry that was given to me by my mother is still in my locker and I plan to give that and some new pieces to my daughter," states 47-years old Headmistress Mrs. Rukhsana Afroz. Upon asking about her 'actual' investments, she replies "I have done some long term buying in property. But I do admit that if I had bought Gold at the same time, instead of property, I would have made a better deal! But alas, in Pakistan, Gold is not bought with the intention to sell."
In recent times, Gold has become very expensive. Investing in bullion requires huge capital. The Pakistani Government recognized this dilemma and established a regulated exchange which offers online trading of Gold. Misbah Khalil Khan, Financial Analyst, Elahi Group of Companies, who invests in Gold through Pakistan Mercantile Exchange (PMEX) views liquidity as a major factor of trading in gold stocks. He also remarks, "With a small amount of capital, I was able to trade in gold contracts offered by PMEX through my broker ACM Gold. Because of leverage, I am able to buy Gold for literally 5% of its actual price and still getting the full exposure. And even when Gold price is down, I can short-sell and still make profits." PMEX, as an exchange, has also been offering physical gold for trading/investing purposes. This is the most authentic form of Gold available in the market, in an internationally acceptable tamper proof packaging, imported from PAMP SA, the world's biggest Swiss refinery. The Exchange uses ACM Gold as their sole suppliers of physical gold and this is the reassurance that the investor needs because ACM Gold is known for its integrity with their reputation going back almost a decade.
An Actuarial Science student, Aakash Ahuja, is looking for ways to invest his savings, "I found gold to be an attracted investment as with my studies, it was convenient to monitor the 21-hour operational market in this industry." For investors coming from his age circle, "I believe historical gold prices have shown to rise and are a suitable option for young passive investors who are willing to save certain amount from their monthly incomes and when taxes are on rise in Pakistan, I find my non-tax gold returns to be lucrative!"
When it comes to maintaining large portfolios and institutional investments in Pakistan, these also mostly offer around 20 per cent exposure to Gold. "Currencies are not backed by anything tangible; however, Gold has an intrinsic value which will never make it worthless," says Kashif Rafi, SEVP, Arif Habib Investment Ltd. "Gold will give all kinds of investors a brilliant hedge against currency depreciation, which is why it is a good idea to back your funds with Gold." Pakistani Rupee has declined by almost 40% in the last 10 years, and this gives Gold an extra push as Gold is denominated in Dollar, making it a good security in Pakistan. On asking Muzammil Aslam, Former Economist of JS Global and currently running a Research Consultancy, about the depreciation of Pakistan Rupee, he explains, "In Pakistan, the government has accumulated so much debt, whilst continuously printing money. Moreover, with the nearly $2bn International Monetary Fund (IMF) payment and falling interest rates, the situation does not look very hopeful in the long run, causing Pakistani Rupee to depreciate even more. Also, the upcoming election year leaves an uncertain picture. However, I do believe that the interest rate cut cycle will be over soon. But with this entire uncertain situation, Gold appears as a necessary element of a portfolio."
The Securities and Exchange Commission of Pakistan (SECP) has recently allowed asset management companies to offer Gold schemes to investors. The introduction of this scheme was a longstanding demand of local market and is expected to become very popular among the general public. "Pakistan has not yet seen an authentic Gold fund. This will give investors, with limited investment background, opportunity to take hassle-free exposure in Gold. Lack of new listings at the local stock exchange and continued depreciation of PKR has made Gold preferred asset class for investment community. We also have a huge Shariah Compliant Market in Pakistan, in which this fund will be very popular," says Muhammad Imran, Chief Investment Officer, ABL Asset Management.
Gold is continuously chasing an increasing price channel. Simple economics tells us that with a scarce supply of gold and increasing demand, the price differential points towards an escalating trend. "With the technological demand for gold on the rise, we witness high purchases coming in from industrial, medical and electronics arena. Alongside, central banks around the globe and countries such as China have been backing up their gold reserves. On the other side, the increasing cost of mining has led to a cut in gold production. Thus, as the demand continues to escalate, the supply is limited, putting pressure on its price," explains Omar Abdar-Rehman, Professor of Macroeconomics at Wayne State University, Michigan, USA.
Gold's increasing price trend is also a result of its safe haven influence. On asking ACM Gold Analyst, Junaid Zakaria, he replied, "If gold is standing above $1700 an ounce today, it is not only the result of supply and demand; it is also the overvaluation in terms of 'safe haven' appeal as global crisis continues to thwart the other asset classes' returns." The U.S. economy, facing a high stubborn unemployment rate might result in devaluation of Dollar. On the Europe side, Greece is on the verge of default and the leading Euro economies like Germany and France are hesitant on providing bailout packages to their fellow debt laden states.
"The crisis situation in the West and Europe has had its trickle down affect worldwide," added Zakaria. "Credit rating agencies are downgrading world leaders like USA and France. Investors are left with no option but to swap these major currencies pairs for some lucrative asset class like Gold. I believe gold can be the very next future currency." In other major economies like China and Japan, increasing trade deficits are being witnessed due to lower consumer demand from the world. The continued tension in Middle East and Africa has also made investors wary of global economic conditions. This all adds to the safe haven allure of Gold. He further puts, "I believe the value of gold hardly decreases over time as the yearly trend of buying bullion on various occasions is still instilled in local communities of Pakistan, India and China. Gold may undergo some correction in price, but over time, the value rises."
Gold is expected to remain bullish. Therefore, it is advisable to gauge the risk, return and liquidity of each asset class and then diversify your portfolio with an easy to manage asset of profound value - Gold.
ABOUT THE AUTHORS:
Sabika Khan is a Research analyst at ACM Gold Global. She is also an independent financial journalist, and has written several publications on investments and diversification. She has done her majors in Finance from Institute of Business Administration, Karachi, Pakistan.
Samra Shah is a Fundamental strategist for commodities and currencies at ACM Gold Global. She is an active proponent of Gold as an investment and her views have been published globally. She has done her majors in Economics and Finance from Institute of Business Management, Karachi, Pakistan.