Gold is probably one of the most controversial and perplexing asset classes. Some well-known investors like Warren Buffett call it useless while other investors take the middle path and recommend small allocations. As for investors, they often struggle to think about it in a portfolio construct. So we caught up with Chirag Mehta, senior fund manager at Quantum Asset Management who also manages the Quantum Gold Fund.
In this conversation, Chirag talks about:
- His journey into the markets
- His perspective of what happened in the markets last year
- What moves gold prices
- Why do Indians love gold so much?
- Historical performance of gold in India vs equities and bonds
- Pros and cons of various gold options like physical gold, gold ETFs, Sovereign Gold Bonds, Gold Mutual Funds etc
- What roles gold plays in a portfolio
- How much to invest in gold
- His thoughts on some popular arguments against investing gold
- Central banks actions and their impact on gold going forward
- How do Indian gold ETFs and Mutual Funds manage their gold, where do they store it, safety measures etc
- Things to keep in mind when picking gold funds
- His personal investment philosophy
- Some unique stories from his career
- Some reading recommendations
Timestamp
0:45: His journey into the markets.
6:30: What moves gold prices.
9:20: His perspective of what happened in the markets last year.
12:35: Why do Indians love gold so much?
14:04: Historical performance of gold in India’s equities and bonds.
15:15: Pros and cons of various gold options like physical gold, gold ETFs, Sovereign Gold Bonds, Gold Mutual Funds etc.
18:56: What roles gold plays in a portfolio.
21:21: How much to invest in gold.
22:58: His thoughts on some popular arguments against investing gold.
27:10: Central banks actions and their impact on gold going forward.
31:33: How do Indian gold ETFs and Mutual Funds manage their gold, where do they store it, safety measures etc.
34:28: Things to keep in mind when picking gold funds.
37:23: His personal investment philosophy.
39:02: Some unique stories from his career.
40:50: Some reading recommendations.
Episode Transcript:
Sahil: Hello, everyone. Thanks for tuning into this episode of Zerodha Educate. In this episode I caught up with Mr. Chirag Mehta, senior fund manager at Quantum Asset Management. He’s a qualified CAIA and has been at quantum for over 15 years. And today we speak about gold.
Chirag has a broad and deep understanding about managing this asset class at a very high professional level and he shared some really valuable insights on how retail investors can understand, participate and manage the gold positions. We also get to know what macroeconomic factors affect gold and why it behaves differently than other assets. So let’s begin.
Chirag, so good to have you on our show, welcome.
Chirag: Thank you, Sahil, thank you for having me.
Sahil: We have a lot of questions regarding gold today, but let’s start with the background, this journey of getting into finance, then becoming a fund manager and your time at Quantum. How did it all go about, tell us something about that.
Chirag: Sure, absolutely. Yeah. It’s been a fascinating journey for me. I always had that logical and analytical bent, in quest for numbers overall. So I think I was made for the field of finance overall. Maybe I was not too qualified to become an engineer or do things which are really fruitful. So I kind of chose to be on the finance side and given my quest for numbers always helped me to progress further here.
The learnings I had in my internship with a company called Kotak and Company, which is a company that kind of deals in physical commodities, especially cotton. So I learned a good deal about managing, seeing the commodity grade and learning hands-on in that and also we worked for a company called or an entity called Federation of Indian commodities. That company did projects to get the regional commodity exchanges on a common platform, although it didn’t succeed. But I got an opportunity to work with stalwarts in that industry. If you know Mr. Nanshekhar, Mr. Chandrashekhar, Ms. Dina Mehta, Mr. Kotak, all those guys were involved in that entity and trying to uplift the regional commodity exchanges.
So I learnt a great stuff there and that is how I got fascinated to the world of commodities. That’s where I got the first exposure and it kind of intrigued me a lot, and thereafter when I joined Quantum, I was assigned to analyze commodities overall for the organization and then went on to launch one of the earliest Gold funds in the country.
So that experience meeting different, several participants in the gold market, learning the tricks of the trade, was really, really, useful and insightful for me and we kind of get went there, learnt it became innovative, educated investors, why gold, why, how much gold, those kinds of traits, and then have them buy in rather than we selling our fund to them.
So that is the approach that we had and it’s been a great journey of migrating from commodities overall to look at alternative investments, after the gold fund be it the multi-asset fund, the equity fund of funds and of late recently the ESG fund the kind of field of sustainable finance is growing significantly and that is a great area to be in, I think without sustainability, the financial field won’t grow much. So I think that is one area, which I’m really happy to be part of the ESG fund and I think that’s going to become significantly mainstream, the way gold has become mainstream in India, I think sustainable led funds is going to be the main streaming of the financial world.
Sahil: I’m a huge fan of commodity traders. In my personal opinion, they are the purest forms of traders out there. Historically, this is where trading has the roots. This is where trading began, by trading commodities. I just wanted to know from you how different is managing a commodity fund than say an equity or a debt-based fund.
Chirag: So everything has its own intricacies and details that would make it very, very different, right. So in a commodity you’re dealing with hard commodities, right, and in there you have to be really careful because the quality divergences are significant. You do, it may appear same, but it is two different things overall.
So that is one thing that you need to keep in mind, keep into account. For example, if you note, recently even in China there were 83 tons of gold, which was, you know, which was not really gold that was unearthed. So, you need to be very, very careful when it comes to, because your investors are trusting you with their faith in saying that you will indeed buy a real gold.
Right. So that was one very important thing that we kind of became known to. The fact that we have to indeed be very careful and that is where we designed the rules. So what Commodity, kind of quality of gold we buy, from where we buy, all that became very, very different and that was a real challenging part of it. There are so many types of gold, but narrowing down to what you really wanted to buy, is the challenge of the commodity world. Plus it moves in fractions of seconds, right? I mean, it’s completely OTC market. Like equity markets is revolutionized, you have electronic trading, you see the bid - ask, whereas commodities are largely OTC trades, right? Especially physical commodities, so you have to be very, very careful in terms of where you buy and how fast you can buy, because it’s all OTC, all non-transparent, you have to negotiate. So all those things are involved and all the intricacies go on the backend when we deal in the physical commodity.
So it’s been a real insightful, it’s been real challenge, but it’s equal fun to do it.
Sahil: That’s good, so it’s relatively easier to understand what makes stock tick as in the corporate actions, there’s demand-supply, general economic environment. But what does make gold tick? What does make gold go up and down?
Chirag: Yeah, there are many factors that make gold move. People generally look at demand-supply, but that’s not your real driver of gold. Gold, at the end of the day, it’s money, it’s been the longest persistent currency out there, it’s been money for 5,000 or more years and that is what, that is a trade that makes gold tick really.
People kind of move and see, kind of the very narrow part of the market, which is demand-supply. If you see from a supply perspective, all the gold that has been mined till date is still existed, it’s still out there. So if you are virtually seeing that there is 200,000 tons of gold out there, and you are just measuring 2000, 3000 tons of gold to see whether it will make gold tick or not, you know, that’s not really, what makes gold move. It’s the money trait of gold being money is what moves gold markets, and given that it is a monetary asset, the two big drivers of gold are real interest rates, which is interest rates minus inflation, because that is the real cost of money, right? and if gold is money, the cost of money should be a competing factor to it. So real interest rates are one of the important factors that move gold, and second is the money supply, how much the central banks of the world are printing dollars, printing euros, printing currencies. That is what moves gold because that is the monetary inflation out there, and gold given it’s constrained in terms of supply, you can not significantly increase supply of gold every year, whatever, how much more dollars are printed that is what moves gold.
So these are two main important things that make gold move and thirdly for an Indian investor, it will be how much, how the rupee is doing. If you’ve seen over the years, rupee has depreciated by two, three, 4% annually and that is one other factor apart from the dollar gold price that makes the Indian gold price move. And, and lastly, the cherry on the top is the regulations, right? So you have seen customs duty move weapon down today. The customs duty is about the taxes and duties combined are about 10% in total. So that over the period of time has been different because government changes them and that is one factor also that moves gold prices. But apart from that, if you have to analyze gold, think of it as money.
Sahil: Gold as money! This is something I’ll write down. So in your answer, it seemed that gold is generally, majorly about the macros and we did have a lot of macro activity in 2020 a year we’ll never forget. The central banks were very active, the markets were crashing, then rebounding spectacularly. There was a lot of paranoia, some scare. So from your vantage point, the big picture view that 10,000 feet view, how did it all look?
Chirag: So it was really challenging, right? It was something that, maybe we, if we have to see something similar happen, we had to go a hundred years back with none of us were living, right? So it was really challenging, really filled with uncertainty in terms of how things will pan out, how things will shape up, whether this will end soon, or it will be a long lasting thing for us.
So that was an unknown, amongst us and if you look at gold that did asked for it’s expectations, right? In a year when other assets were collapsing gold was one standing tall, and this has happened time and again. If you look at the 2008 crisis or any of the crisis, gold has stood tall and this time also it did the same.
So gold overall is a great diversifier, it’s a great store of value and that is the thing that it did in a year of uncertainty. So it has always stood the test of times and it has always helped when other things were not working for you. So overall in that uncertain year, last year that we had, so all those who were relying on an asset allocation in having allocation to gold, which we have always recommended or always prescribed those investors were kind of, you know, telling us that yes, your recommendations helped us and the impact on our portfolio is very, very minimal even in the depths of crisis.
So overall that teaches you a lesson in terms of, to have an asset allocation in play, have different assets in play and gold is, again, a very useful asset during such times, to have gold is, is really essential and as always after the crisis the gold’s value becomes amplified overall. So, even last year we saw a lot of investors come in and generate that gold rush we usually see after the crisis, a lot of investors realizing the importance of gold in the portfolio started buying a lot of gold. There was shortage of gold last year because the trade channels were kind of blocked for a certain amount of time. To source gold to get gold and ensure that each and every unit is backed by gold, was the task that we had at that point in time and I think we delivered well. Investors bought and were able to buy, investors who kind of had a crisis and had to sell gold were easily able to sell gold ETFs or gold funds holding of theirs but if they were holding physical gold, they were not able to do so. So again, this amplified the value of gold and also what forms of gold you should be buying into.
Sahil: Apart from uncertainty and crisis, Indians generally do not need a reason to rush to gold for some reason, we are a gold loving nation, largest consumer at the retail level consumer of gold.
So we don’t have much of it under our soil. We don’t mine it that much, we don’t have the natural reserves, but what makes us such a gold loving nation historically, and in the present scenario?
Chirag: Historically, there were two main reasons for the gold affinity that we have, right. One was safety and another was liquidity. If you look at rural areas, right? What options do they have in terms of savings? They didn’t have any, financial inclusion was so low that people were reliant on gold because it was safe. They can wear it on their body and that makes it safe and another was liquidity, which means if they want money, even at midnight, they could knock the door of the money lender and get money against the gold that they have. So those safety and liquidity aspects have always helped in terms of making gold the popular instrument that it has.
Secondly, if you look at gold as an instrument, it has always so far helped the households in whose balance sheets that was, because if you see returns from gold has been significantly better or at par with any other instruments out there, right? Of course, equities over the long run have generated higher returns, but at the same time they have been equally volatile.
Sahil: Right. So this is a followup question to this extension, how has gold performed broadly in the markets compared to bonds and equities?
Chirag: So if you look at a long-term return, say like 15, 20 years returns from gold and equities, gold returns have been a tad lower but at the same time, if you were to look at the volatility or the drawdowns in gold and equities, the drawdowns in gold have been half of what we have seen in equity markets. The volatility is a tad lower, maybe four or five percentage points lower than what we see in equities and therefore a slightly lower return is warranted to the risk that you are taking.
So overall, I don’t think gold has fared poorly as compared to the competing asset classes. It has done better than bonds and slightly lower than equities. So overall, there is a good performance and all those households who have a large portion of their money lying in form of, you know, gold holdings, it hasn’t disappointed them so much. It has given them good, decent returns and comparable to the risk-adjusted returns of any other asset class out there.
Sahil: Right. As you said in a rural context, a lot of times people were buying gold because they could wear it on them but in 2021, we have n number of ways to take a position in gold. So what would you say is the best way for the average investor to take a position in gold? Is it bullion, is it sovereign gold bonds, ETFs, mutual funds, how?
Chirag: Sure, initially, if you look at, maybe 15, 20 years before, right? Holding gold in other forms was prohibited, even in forms of coins and bars, it was allowed to a certain extent, not beyond a large extent.
So jewelry was a predominant form allowed for buying gold and holding gold. Things have changed now, right? But still that, there is inertia, that is, there is that habit form that whenever you buy gold, even though it is for an investment purpose, people tend to buy jewelry. You know, there is very thin line between what people buy for, right? Be it for consumption or be it for investment. But it’s time now that investors differentiate why they are buying gold, for consumption or wearing, you don’t have a choice, you have to buy jewelry. But for investments, there are so many efficient forms that have come, which are, we are significantly better, which give you that gain for you for the buck that you have.
For example, gold ETF, gold ETF I think it’s the best financial innovation out there. Why do I say so? Because it allows a retail investor buying say a half a gram, one gram, or even lower quantities at a price, at which tons and tons of gold could exchange between a bullion bank and a gold producer. When a bullion bank buys from a gold producer, they’re buying a hundred tons or significantly higher quantities from the gold producer directly, and then channelizing into various media.
So the gold ETF allows them to buy at that prices, you know, that is the efficiency that it brings from the wholesale level to the retail level and that is why I call it the best financial innovation. Apart from the price efficient it offers, people don’t have to worry about the purity they can buy sitting at home and even in the lockdowns that we saw last year, which I hope we don’t see any, going into the future but still in that times also people are able to easily buy and sell with liquidity of the amount that they wanted.
Whereas in physical gold, when you are holding physical gold, there were people who had emergency and wanted to sell gold, but were not able to do so because shops were shut, right? So that really tells you that this is the time this crisis has given that the opportunity to transform behavior and very tough decisions or very significant change in habits only come when there is a crisis, right? and this crisis has given, shown many people that way and we are incrementally seeing a lot of people going towards these efficient forms of buying gold, like gold ETFs, gold mutual funds or be it sovereign gold bonds.
So anytime I think if you are looking to buy gold first, say for what reason you’re buying to, is it consumption or is it investment? And when it comes to investment, it has to be only these new age, efficient forms that have come, which is either gold ETFs or gold mutual funds or the sovereign gold bonds.
Sahil: Makes sense. So as per the expectations, which will be set by the investor as an average investor, what expectations should I have and not have with my gold holdings? Is it as a safety hedge? Is it something to generate wealth or is it just to conserve my wealth?
Chirag: Yeah. So the biggest role that gold plays is being a portfolio diversifier. We tell people that invest in gold today and pray hard that it falls in value by 50% tomorrow, the very next day, it should fall by 50% after you have invested. Why? We always advocate that you should have about 10 to 15% allocation to gold in your portfolio. If that 15% allocation that you have falls by half, which means that your 85% of your value or your portfolio will be doing much better and therefore, whenever that 85% is not doing well, you better have this 15%.
So that is how we tell people to look at gold, really, and the biggest role that it plays is diversify because when your 85% is not doing well this 15% will help you, and whenever there is a say inflationary prospect, like India has had high inflation for long periods, right? Even when things were better, we still had three, four or 5% inflation, and if you look at the long-term average, it has been seven, 8% kind of inflation. Even in the future we expect five, 6% inflation to persist given the growing economy that we have and gold is a great store of value many times we have seen your fixed income instruments, your FDs for example tend to give you negative returns on a real basis because your FD today gives you around 5% returns.
Today. Inflation is more than 6%, so even today, with your fixed deposits, you are earning negative on a real basis that doesn’t do good to improve your standard of living. The money that you’re saving hard is to ensure that your standard of living improves over a period of time. With equity it is possible, gold over a long periods at least matches your standard of living, with fixed deposits, you kind of are many times on that negative, real return.
So that is the role that gold plays being a portfolio diversifier and being a great store of value.
Sahil: Right. So one of the extensions to your answer would be, investors generally have a very hard time as to how much do I allocate. Many people are giving this a one size fits all number, be 5% or be 25%. So how should an investor allocate it to the gold holdings?
Chirag: I think one size fits all is the answer for that. I think it’s a very narrow band and that is tested with numbers. So we kind of recommend that investors have 10 to 15% allocation to gold and the reason for that is, at 10 to 15% allocation of one’s portfolio it doesn’t compromise the overall returns of a portfolio. It kind of augments that, improves that a little and at the same time, the risk that you end up taking off the overall portfolio reduces significantly. When you have 10 to 15% allocation to gold.
So overall you’re not compromising on returns, whereas the risk of your overall portfolio reduces substantially with that 10 to 15% allocation to work. And therefore, that is backed by hard numbers. The risk adjusted returns continue to improve with the addition of gold but beyond that 15% mark it kind of diminishes the overall starts diminishing the overall return and therefore 10 to 15% is tested by hard numbers and I think that is the number that we recommend people to have 10 to 15% allocation to gold, and that should help you diversify adequately without impacting over a long-term returns of your portfolio.
Sahil: So now there are some arguments against gold, which I want your take on. One would be gold by itself is a volatile asset. So if you paired it with equities and other volatile assets. How does this pairing play out? How does it make sense to put two volatile assets in your portfolio?
Chirag: Yeah. So just to clarify, that gold’s volatility is a tad lower than equities. Of course, equities have a higher return to compensate for that volatility. If you look at the time periods in which, what factors that move gold or what factors that move equities are very, very different sets of factors and therefore we have seen that, there is a negative correlation between equities and gold. Whenever equities are doing well, gold generally doesn’t do well unless there is an inflationary prospect that kind of lifts both the asset classes. We have seen periods of that as well, but most periods when equities do not do well, have given you negative returns, those years gold tends to do well. And therefore, both being significantly volatile asset classes, it tends to help you because both move higher in different time frames and therefore it’s like a second engine of your aircraft or your boat. When one engine is not working, the second engine kind of lifts you or takes you higher.
So that is what role that gold plays when your equities are not doing well, when they are volatile, when they are crashing, there is a gold which probably will do well and will help you. So for example, if you take an a year like 2008, right? 2008 equities fell by 50%. If you had a goal, for example, your child’s education, right? Maturing and payment due in that year, would you sell equities at half percent, a 50% loss, or would you mind embarking on gold, which is up 30% in that year, right? So it helps you, that diversification really helps you to fulfill your immediate goal, a financial goal that you’re looking for. And that is where the usefulness of gold, times when equities are not doing well gold will ,hopefully, do well. That is what we have seen historically, at least.
Sahil: That’s a nice analogy you gave the second engine to your portfolio. There’s this other argument, which keeps coming up, that goal has long drawdowns, the periods in which it does nothing, just sits. So a better way to invest gold is to enter an exit to time your entries and exit, rather than just holding it for longterm. What’s your take and opinion on this?
Chirag: So I think an allocation to gold of one’s portfolio has really worked well. You don’t know when the uncertainties kind of come, no-one predicted 2020, right? No one predicted 2008, 2008 was to some extent predictable, but no-one predicted the 2001, 9/11 attacks, right? So there are certain unknowns which are kind of unpredictable, you don’t know when they’re come in front of us and impact our portfolios.
To have an allocation is most designed. Whereas you can trim that allocation up and down depending on the cycle that you are and that is what we typically call as rebalancing, right? Whenever gold has done well your other asset classes may not have done so well and therefore it calls for rebalancing and allocating, taking profits from gold and investing into asset classes that has not done well which is equities and similarly goes the other way. So in some way, you’re tactically moving from an asset that has done well to an asset that is not doing well. So that in the next cycle you kind of make more profits there. So I will recommend that at least a some portion of your portfolio to be there at all times and some which can be done through rebalances that can be done tactically. So to give you an answer, a short answer to your question is, have a certain allocation say a 10% allocation at all times and that 5% can be that rebalancing creates that you could do.
Sahil: Correct, makes sense. So there’s this guessing game going on as to what central banks would do, would they become, would it not come? So it has become, you know, a breakfast, lunch and dinner conversation of every investor. So how do you think it’s going to impact gold going forwards in this record?
Chirag: I think what central bankers across the world do has a big bearing on gold because essentially what they are doing is, one, rig interest rates that they are kind of controlling that, and second is they are kind of keeping a tab on money supply, right? Both factors, as we have discussed before, tend to move gold in a very big way.
So looking at the scenario today, right? So far we have had that V-shape recovery. So it will all boil down to whether the growth momentum continues or not. Right. And whether the inflation that we have today is going to be transitory like what central banks tell us or not. So those are the two factors that will determine how gold will behave going forward and so far we have seen that V-shaped recovery. Many expect that the V-shape recovery is going to continue in the same manner like we have seen over the last few months, but our guess is that any recovery from here on will be gradual. It’s not going to be that V-shape that we saw.
Given the amounts of money that were being pumped in by central banks, trillions of dollars with interest rates kept at the zero bound would lead to certain recovery and I think that recovery is behind us, going forward, we will see recovery, but it’s going to be a lot more tepid and small, lot more gradual than what we have seen and therefore, central bankers will need to be accommodative.
Today we are slightly, tad better than what we were in the depths of 2008 crisis from an employment perspective, from an economic recovery perspective, right? After the 2008 crisis, central banks had to keep rates low for six years, and this time I don’t think that economy is good enough that it will not need that support. So what we think is, central banks will have to keep rates low for an extended period. They will have to give that support in terms of money printing, to keep that momentum going, and both these factors will help gold because we think that inflation with growth that we have seen is kind of a little sticky with kind of the wage inflation is about to set in, if you look at the minimum wage increases in the U.S that have been promised at $15 were significantly higher than the rate wages that stay today and therefore, whenever we have seen episodes of wage inflation, it tends to be a lot more sticky. It tends to be a lot more structural as opposed to transitory as central banks call it today.
So on a real interest rate basis, we think real interest rates will be lower. will stay lower for an extended period because if you see both the sides of the equation, that is, interest rates are likely to stay low, inflation’s likely to stay higher and sticky and therefore real interest rates, which is interest rates minus inflation, will remain low. Second is they will need to be more accommodative and stay accommodative for some time. They may have reduced the amount of accommodation, but they will still continue printing and from that perspective, there’ll be increase in money supply that is another driving factor for gold.
So both things managed by central banks overall is going to be in gold’s favor. So we think that the best of the days are not behind us. I think gold will see a move higher but I think, the kind of pace that we have seen over the last 1-2 years, it’s not going to be that paced, fast-paced, it’s going to be gradual because at the same time, there is competition from other asset classes like equities and which will kind of lead to the bulk of flows and therefore that’s going to be a challenge to gold, unless we see more uncertainties like third-wave or COVID stays for longer. Gold is going to be a gradually moving asset and it’s going to be moving upside, I think.
Sahil: Now coming from gold in the world. Now, coming to the goal in the mutual fund, how is gold, just out of curiosity, how is gold managed? Where is it stored? What is the quality of gold that is stored?
Chirag: That’s a very good question and I think that that will lend to more buyers of the gold mutual funds out there when they get that comfort and that trust in how we manage it. So overall the way, the gold that we buy is only the London bullion market, accredited investors gold that we buy. LBMA is the London Bullion Market Association, which is an authority in precious metals, is a global authority in precious metals standards.
They have framed certain rules for refiners to follow, and they are very, very stringent. So only those refiners gold is what we buy and it is 24 carats gold, it is 99599 purity which is akin to 24 carats that we all know about and we have certain stringent rules in terms of once the gold we buy, the gold that we buy shouldn’t have left the custody of the approved vaulters. So anything that say you have purchased and taken home is not that we will accept that gold back in the fund. So each and every gold unit is backed by physical gold and that gold has to be the highest quality that one can get, right? It’s LBMA approved refiners, 995 purity minimum, which is 24 carat and all this gold is stored in very secured and professional vaults.
If you have known entities like Brinks, for example, they have the ATM’s that fill cash, it’s done by these guys and also they have very professional vaults with all the security measures out there, be it armed guards, be it panic alarms, be it the vaults walls with ironclad fillings so it’s difficult to break into, it has those moving alarms, anything that moves it will bring in alarm and they are all connected to police stations and stuff. So it’s all very, very secure out there and all the gold that is owned by the fund is a hundred percent insured and includes even terrorism insurance.
So we don’t kind of compromise on the insurance coverage. It’s very, very comprehensive cover that we take. So overall from an investor perspective, it’s all very, very safe, pure and insured. I think that would give more comfort to investors who are wanting to buy gold in a big way and trusting the gold funds, gold ETFs and gold mutual funds out there.
Sahil: I’ve been very fascinated with this, watching it in the movies. So, how should you pick a mutual fund, which is goal-based? What factors should be considered as an average investor?
Chirag: So from a performance perspective, one yardstick of measuring any gold ETF or a gold fund is a tracking error. A tracking error is nothing but the deviation the gold fund manager has in terms of returns or risk or any characteristics as different from the gold price, right? The amount it deviates more, you shouldn’t buy that kind of fund. Lesser the deviation, it is a better fund for you. That’s one important performance metric that you need to track. Second, what kind of policies and processes that the fund manager has to ensure the safety of your gold? Right. So for example, I am not able to tell about other fund houses’ trades but I can very well tell at least about what we do at Quantum.
We have very strict standards in terms of the goal that we buy. As I said, LBMA accredited refiners, all physical gold, no derivatives, all gold is to be checked and audited by the auditors and we ourselves, including me, go to the vaults every month to check the gold that we have. So we don’t rely on only third party verifications. We ourselves go to the vault and check the gold that we have. Second is we also do what is called as a purity test of the gold. Once in a year we will hire a third party verification agency that will come with their machines to the vault and check the purity of the gold. Although we are very sure of the standards that we follow, the type of gold that we buy, but we also kind of go, hire these agencies to check the purity of the gold.
So we have been doing this for years together and that gives us more assurance on the type of gold that we have for investors and that gives us a lot more comfort in the fiduciary duty that we have towards investors. So overall and lastly, and importantly we educate investors in terms of what things they should monitor when they buy and sell gold.
So we write a gold column, we write a monthly view to educate investors and tell them the traits of gold, what kind of factors are moving gold and what they should keep into account when they’re buying or selling gold. So those are things that we follow to give that add-on or value add to the investors in terms of knowing that the gold is not only safe, pure, and insured, but also what things that they need to keep into account.
Sahil: Chirag, what’s your personal investment philosophy? How do you trade, you know, apart from gold, any insights?
Chirag: Yeah, so I do have a, I keep it as an allocation to gold though. I kind of follow gold very closely. I kind of don’t trade into gold. I think it’s an integral part of the portfolio and I, whenever there is an imbalance in the portfolio allocation, I kind of add it up over a period of time.
And that addition, I kind of try and see. I don’t do a systematic investment, but I kind of knowing the gold market better, I kind of see when is a good time to buy gold and add it at those times, like for example in March, 2020, there wasn’t much movement in gold that we had seen although the factors had become really very conclusive. So that was really telling you something, telling you very, very early on, that was something that was telling you really,that given the factors gold hadn’t moved much and it should have moved higher. So those are the times either investors who do not follow gold closely, kind of added regular intervals by doing a systematic investments. All those who follow gold very closely, those are the times that you could take advantage off and add gold. But personally, I think it’s an integral part of the portfolio and I keep it as an allocation to gold at all times and add it whenever I think it’s a good time or my allocation has gone down to the level from the level that I really need for.
Sahil: Every fund manager, even every trader has some story, which, you know, keeps them up at night at a time where the underlying didn’t move in a way it should have moved or it moved in a way that was completely contrary to what the fund manager was thinking. Any such story where your, you know, area of expertise gave you a bouncer of sorts?
Chirag: Yeah. If you look at the current times, right? markets have been running really expensive from a valuation standpoint for last one year, right? So we do manage a multi asset fund wherein because of COVID gave us a great opportunity to allocate a higher amounts to equities, which we did at that time. So we had a very low allocation before COVID at 25%. In that one month alone, when market crashed by 40%, we lifted our allocation from 25% to 50% and then over as markets rallied significantly and became more expensive, we kind of reduced our allocation gradually and have been sitting at very low allocation at 25% equity, but markets keep inching higher.
So that’s been one thing that’s a little puzzling, but I think we did the right thing in terms of, you know, keeping risk lower in terms of maintaining a lower equity allocation. So that the investors do not, if there is a market collapse, there’ll be very low impact in terms of overall on the equity, on the portfolio that we have in the multi-asset funds. So that is where we see it, that’s one thing that’s been puzzling, but, it’s been testing our patients, but we are kind of very prudent, very disciplined in maintaining our low allocation to equities.
Sahil: Chirag, one more question from you. We had a lot of takeaways from you today, but one final takeaway, if there was this one movie or book or podcast or anything you want to recommend that every investor should at least, you know, or read through it, go through it, which recommendation would it be?
Chirag: So if you were looking at a macro overall, and that is what, something that moves gold, there is a lady called Lyn Alden. You can see, she writes fabulous stuff in terms of comparing history over many, many years, maybe a hundred years ago, and what happened then? and what’s happening now? Because you know, there is a lot of comparability, the principles don’t change often, right? And therefore there is some cues to take from historic lessons that we have. So maybe that.
Or you could refer to Mises Institute with great lessons in Austrian economics. That is what, and thirdly, if you look at a company called Incrementum, they have a very detailed report called In Gold We Trust. That is something that has fascinating charts, fascinating, historical analysis, fascinating things about factors that move gold. So these are the top three things. I think that investors, if you want to learn more about gold, these are the things that you could refer to and I think it will be a great value add.
Sahil: Fantastic. Thank you so much, Chirag. This entire conversation was filled with gold nuggets, if I can say that. So, of course with this podcast episode, we have learned a lot about gold and for many investors, their perception of gold might have changed because of it and they will also delve deeper in their own research and their own study, which is very important for the investors regardless. So thank you so much, Chirag.
Chirag: Thank you, Sahil. It was a great conversation and I hope investors make the right choices, at least when it comes to investing or buying gold.
Sahil: Absolutely. So this is what we have for you today. In this episode of Zerodha Educate, we’ll meet you with another guest on another great topic.
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