With Diwali round the corner, one of the most auspicious gold purchasing occasions is back in the country. While gold prices have climbed up yet again after having witnessed a sharp correction in the first few months of this calendar year, gold buyers have been left thinking if they should buy gold at these levels and if the prices will continue to harden from current levels. Even as the caution prevails, investors must not forget or deviate much from their asset allocation strategy and considering that we continue to live in uncertain environment gold definitely is an asset that deserves some allocation from investors as it preserves its value and also acts as a hedge against inflation and rupee depreciation.
If calendar year 2012 was the worst year for gold in terms of returns generated for investors in the last 8 years, the beginning of 2013 too was shaky as gold prices fell sharply following a revival in the equity markets. Last six months, however, have been very uncertain —rupee depreciated to record low levels, there was volatility across the markets worldwide following the news of tapering of quantitative easing by United States and geopolitical concerns with relation to Syria. Amid these concerns, gold in rupee terms has witnessed a smart recovery and over the last six months its prices have grown by over 15 per cent.
At Rs 31,840 per 10 grams (closing price of gold standard in Mumbai on Friday) gold is trading at a level that is close to what it was trading a year ago but the returns generated by them during this calendar (between January and October 25) has crossed 13 per cent, thanks to the surge in prices over the last six months. While the year-on-year change in price is only 3.8 per cent, the volatility in the price over the last one year means that if you had adopted the systematic investment plan route to invest in gold and had invested an equal amount on 15th of every month, then you would be sitting on a comfortable return of close to 9 per cent.
A comparison of returns generated by various asset classes over the last six month shows gold outperforming equities and all other asset classes except for international equities. While gold funds on an average have generated a return of 13 per cent, the BSE Sensex in the same period rose by 8 per cent and the average return generated by large cap equity schemes stood at 5.9 per cent. International equity schemes however generated an average return of 17.4 per cent in the same period.
Current environment and gold
In the period between May and August rupee depreciated sharply against the dollar by over 20 per cent and has therefore led to a sharp rise in gold prices in rupee terms. It however regained some of its lost ground over the last 6 weeks on the back of US deferring its tapering plans on its ongoing quantitative easing program and the Reserve Bank of India taking several measures to bring down rupee volatility and dollar expenditure. But market experts believe that rupee may continue to remain weak and if that remains the case, gold is a decent place to remain invested in.
"For India to remain competitive in the world market, the rupee will remain at depreciated levels and if it depreciates further over the next three years to gain competitiveness, then gold investment will not only generate healthy returns but also provide investors a hedge against rupee depreciation," said Ritesh Jain, CIO, Tata AMC.
However, there are others who think that globally the momentum is not building for a significant uptick in gold prices and therefore the upside is limited in the near term.
"We are not seeing investment demand for gold flowing in and there is not much of fund participation too. Thus we believe that gold does not have much of an upside from the current levels over the next few months," said Rajini Panicker, head of commodities research at Phillip Capital.
A market expert who did not wish to be named said that over the next five years rupee is expected to depreciate and that only augurs well for gold investors in India.
Should you buy gold this Diwali?
Even though gold in Diwali is bought mainly because it is condsidered auspicious to buy the metal during the festival, a number of individuals also buy it from an investment point of view. The festival becomes an auspicious occasion to buy gold to meet future financial goals such as marriage.
The gold prices may seem high and the government too has done its bit by raising the import duty on gold to 10 per cent now from 2 per cent towards the beginning of this calendar but experts feel that you must continue with your purchase and follow your asset allocation.
"You must route 10-15 per cent of your investment into gold. Investors will not only see better returns in the long run but also hedge themselves against inflation and currency depreciation," said Jain.
There are others who feel that anywhere between 5-10 per cent should be routed into gold and investors should not go overboard while investing into it following any rise in prices.
What is the best way to invest?
Gold prices have remained volatile in the past and there is a likelihood that they will remain volatile in the near future. In such an environment it is best to through systematic investment plans (SIP) or monthly allocation of fund into gold so that you average out your cost of acquisition and benefit when the prices rise on the overall investment.
As far as the mode of investment is concerned, exchange traded funds (ETF) of mutual funds score over your traditional jewellers gold coin not only in terms of pricing but also in terms of purity and the price you can fetch at the time of sale.
The exchange traded funds’ also score over the bank’s bar or coins on pricing and liquidity as bank’s are not allowed by regulation to buy back the gold from the customers.