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  1. With gold prices falling, few tips on when to invest in it

With gold prices falling, few tips on when to invest in it

Analysts suggest investors should purchase the metal in a staggered manner rather than buying all the desired purchases at one go

By: | Updated: July 28, 2015 11:36 AM
Gold rate today

Gold acts as a hedge in one’s investment portfolio as the metal has an inverse correlation with the equity market. (Reuters)

Gold, which is one of the most preferred assets for Indians, is fast losing its glitter. Strong selling in China and institutional investors (like exchange-traded funds) on expectations of higher US interest rates have dragged down the price of the metal in the global market to a five-year low of $1,090 per troy ounce last week, and down more than 40% from the all-time peak of $1,900 in September 2011.

Analysts say gold prices are likely to stabilise at $1,000-1,050 per troy ounce by the end of this year because of global macroeconomic conditions and slowing down of China, one of the world’s biggest gold consumers. A rise in US interest rates will clearly signal that the economy of the world’s largest country is growing and institutional investors will pull out money from gold and invest in US government paper. A possible hike in the interest rate will trigger a dollar flight from emerging markets like India. Also, the winding down of US Fed Reserve’s bond-buying programme will stop the flow of money in commodities such as gold.

India Ratings and Research has maintained a negative outlook on gold prices for the current financial year. It believes that movements in gold prices will largely depend on the US interest rate decision. If there is a rate hike, the agency estimates, global gold prices could drop and range between $900 and $1,050 per troy ounce. However, they are unlikely to remain at the lower end of the range and will possibly settle at around $1000 per ounce.

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In India, lower inflation and strong performance in financial assets have diminished gold’s appeal as an investment as the 12 months to June-end, Nifty had given 11% returns while gold dropped over 6%. In fact, gold has given negative returns for three years in a row. Since equities are faring better, gold demand for investment has also dropped. Data from World Gold Council show that investment demand for the yellow metal (bars and coins) in India fell to 41 tonne in the quarter ended March 2015 from 122 tonne in the quarter ended June 2013.

Demand for jewellery dropped to 151 tonnes from 188 tonnes during the same period. Even in mutual funds, investors have redeemed R231 crore of gold exchange-traded funds (ETFs) till June this year.

Analysts say investors must wait for some more time before buying the precious metal. Naveen Mathur, associate director, Commodities & Currencies, Angel Commodities Broking, says, since Dollar Index is likely to gain momentum even more in the coming months and the safe-haven appeal completely done with, gold prices are expected to remain in a downward spiral.

“So, retail investors should wait for six months to buy at attractive levels of R23,500-24,000 per 10 grams,” he says.

As gold is more of a store of value and a hedge against inflation, it does not make much sense to invest in the metal at present as inflation is within the range of Reserve Bank of India.

Analysts also suggest investors should purchase the metal in a staggered manner rather than buying all the desired purchases at one go. Anil Rego, chief executive officer and founder of Right Horizons, a wealth management firm, says investment in gold should be planned based on the expected returns, associated risks, benefits and asset allocation.

“Investments are financial decisions, which should be based on one’s asset allocation rather than emotions. A long-term horizon will help mitigate the risk by reducing volatility, and it is ideal to make investments on a regular basis rather than once,” he says.

Gold acts as a hedge in one’s investment portfolio as the metal has an inverse correlation with the equity market.

“Thus, when the equity market does not perform well, gold normally yields higher returns and vice-versa and, thus, the portfolio returns are balanced,” says Rego.

Financial planners suggest that, ideally, a retail investor should not allocate more than 10-15% of one’s investment portfolio in the metal as any steep and prolonged downturn in its prices could reduce the returns in the long run.

However, unlike real estate, investment in gold is highly liquid.

If one still buys gold at the current price levels, they should look at various options in the market apart from jewellery, bars and coins.

* Strong selling in China and institutional investors  on expectations of higher US interest rates have dragged down the price of the metal in the global market to a five-year low of $1,090 per troy ounce last week, and down more than 40% from the all-time peak of $1,900 in September 2011
* Analysts say gold prices are likely to stabilise at $1,000-1,050 per troy ounce by the end of this year because of global macroeconomic conditions and slowing down of China, one of the world’s biggest gold consumers
* A rise in US interest rates will clearly signal that the economy of the world’s largest country is growing and institutional investors will pull out money from gold and invest in US government paper
* A possible hike in the interest rate will trigger a dollar flight from emerging markets like India. Also, the winding down of US Fed Reserve’s bond-buying programme will stop the flow of money in commodities such as gold

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