While gold is the favourite asset class of many Indian investors because of its safe haven status, the metal has lost its value by about 17% since it peaked in mid-March this year at $1,380 an ounce.
Prices have been on a steep decline of late, sinking 6% since October 21 and 10.24% in the past three months. The sell-off in gold began when the metal broke through $1,180, the lowest level reached during last year. Gold prices plunged 28% in 2013, continuing the fall from the previous year.
The economic optimism in the US is evident from the Fed’s confidence that the labour and housing markets — the two biggest sectors in the US — are gaining traction. Besides, consumer confidence, which represents 70% of the US economy, is at the highest point now since October 2007. A strong economy has led the Fed to tighten its monetary stance as it winded up its bond buying programme last month. Now, it plans to keep a close watch and a key event is the timing of hike in interest rates in the US.
The reasons for the recent decline in prices are a combination of factors, starting from the Fed winding up its QE3 programme, growth in the US economy, strength in the dollar index and muted geo-political tensions. Declining inflationary trends on the back of falling crude prices dragged gold on a downward trajectory.
The recent easing of monetary policy by Bank of Japan and comments from the ECB (to print money) pushed prices lower. Besides, weak physical demand from Asia, India and China in particular, and a selloff in gold holdings at the SPDR gold trust, also contributed to the fall in prices.
Gold holdings (as on November 6) stood at 732.83 tonne, a six year low. On a year-to-date basis, gold holdings have declined by 65.39 tonne (8.19%), indicating waning interest in the metal as an asset class.
Spot gold prices are currently trading at $1,164/oz and, hereon, the price trajectory will depend on the policies of the central bank, falling crude prices and a falling inflationary scenario. This will reduce gold’s appeal as an inflation hedge.
Rising equities will lead investors to reduce their exposures in gold and invest in other asset classes offering
Hence, growth in the world economy at large will be the major factor for gold prices to head lower. In the next four months, spot gold prices can correct towards $1,050/oz while, in Indian markets, MCX gold futures (CMP: R25,825/10 gm) can possibly correct lower towards Rs 24,000/10gm.
The question now is whether this is the right time to invest in gold as an asset in any form — whether ETF or physical gold. Since prices are likely to fall further, investing in it at the current level is not advisable.
The strategy, however, would be to accumulate on dips as the long-term fundamentals of the asset will strengthen once demand from China and India, the two biggest consumers of the yellow metal, rises again.
The recent easing of monetary policy by Bank of Japan and ECB comments on printing of money pushed prices lower
Weak physical demand from Asia, India and China, and a selloff in gold holdings at the SPDR gold trust, also contributed to the fall
The price trajectory will depend on the central bank policies, falling crude prices and a falling inflationary scenario
By Naveen Mathur
The writer is associate director, Commodities and Currencies, Angel Broking