WF: Why gold and why now?

Ashish: We look at gold as an asset class that must be owned in addition to the traditional equity and fixed income asset classes. Gold looks very attractive from a long term perspective and is a very good diversifier in any investment portfolio.

Gold has always had a traditional appeal in India as an asset class as well as for jewellery purposes. There is a strong psychological comfort that Indians draw from owning gold. This is true of India and is increasingly true in China as well. Gold ETFs represent a convenient and cost effective way of catering to this demand.

The other factor is the prospect of high inflation. If you see the kind of monetary stimulus measures that every Central Bank has taken, the chances of inflation shooting up are very high. Gold acts as a natural hedge against inflation.

And the other things also which we need look at, is all the commodity prices, especially oil and gold are inversely correlated to dollar. If you look at the numbers which are coming in from the US, I don't see a case for a strong dollar. The numbers also don't suggest any imminent unwinding of the stimulus measures - at least during 2010 looks difficult. So my sense is that dollars weakness would continue.

WF : Gold has corrected from its life time high of US$ 1225 to the US$ 1065 levels right now, on the back of a dollar rebound in recent weeks. Is this a trend change or just a technical correction?

Ashish: I think this is a healthy correction. Any market which continues moving up is a sign of a bubble. So I would see this as a very healthy correction.

The dollar is strengthening because of concerns in Europe and UK. But, there is nothing I see which suggests that the US economy is now on a stronger footing and therefore its currency needs to rise on a sustainable basis. We are very likely to see dollar weakness resuming later this year - and that can give momentum back to gold.

Apart from the dollar, we must also keep in mind that the demand - supply situation for gold favours increasing prices in the medium to long term. Production peaked in 2001, after which it has been declining - while demand continues to grow.

WF : How will you position gold for Indian investors? Is it something that would sit between equity and fixed income in the risk-return spectrum?

Ashish : I will advise investors to take up a third asset class - buy gold in addition to equities and fixed income - as a small part of your portfolio. Equities are volatile - and with the FII involvement in Indian markets - will continue to remain volatile. Gold is less volatile than equities, is likely to deliver lower returns than equities but in my view can outperform fixed income returns. Gold is a good diversifier in any portfolio.

WF: What can go wrong with this whole theory about gold as a good hedge ?

Ashish: One big concern is if there is an actual sovereign default - in any European country for example, risk aversion will sharply increase - and money may flow into the US dollar - as a safe haven currency, at least in the near term. That can potentially cap the upside on gold, at least in the near term.

Having said that, we must bear in mind that Central Banks have shown an ability to act in a co-ordinated manner in the face of any crisis - it is quite possible a similar coordinated attempt will help some of these countries to be bailed out rather than see them actually default on their sovereign debt.

WF: In terms of the construct of the product this is a pure ETF product that you have launched. Do you have plans like other AMCs to create a fund of funds product that will allow an advisor who does not have terminal to also offer this product ?

Ashish: Till now, SEBI has not yet given approval for these FoF products that you are referring to. They are still on the drawing board. As and when SEBI clears these products, we too shall consider an FoF version of our gold fund.