Gold prices have been on a winning streak since 2000, taking cues from global economic woes. But such gains were rather limited or nixed after reports of the global economy gaining traction. Reversing 13 years of consecutive gains, gold started losing its sheen, declining more than 32 percent so far from its all-time high hit five years back. The benchmark London gold spot had hit a record high of $1920.30 a troy ounce on 6th September 2011, but later lost the momentum and started reversing.
Gold in the key London market is currently traded at $1275 an ounce. It has recovered from its mid-December low of $1122 an ounce, gaining about 14 percent during the period. At the same time, domestic gold gained moderately with prices in the futures market increasing only about eight percent due to a strong domestic currency and moderate physical demand.
“Looking ahead, the ongoing positive sentiments are likely to continue, supported by prevailing global geopolitical uncertainties. The warlike situation between the US and North Korea and tensions in the Middle East are raising the safe haven appeal of bullion. Worries over Euro zone and delay in hiking US interest rates perhaps provide firm support to the commodity. At the same time, worries over physical demand from the top consuming countries and buoyant global equities are likely to weigh on the sentiments later. Any imminent rate hike by the US Federal Reverse would lift the dollar and adversely affect bullion as well,” says Hareesh V, Research Head, Geofin Comtrade.
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According to Hareesh, the rupee-based movement will steer the course of the domestic gold market. Indian gold prices are usually moving parallel to international market rates. Though there was a sharp rise in international gold prices recently, gains in gold prices in the local market were moderate due to a strong Indian rupee, whose value currently is pegged at Rs 64.50 against the US dollar and which has strengthened about six percent against its December low of Rs 68.80.
Financial experts, therefore, believe that going forward, gold will likely stay elevated given safe haven demand. However, in a rising US interest rate scenario and bereft of any major geopolitical event, any upside in gold could potentially get capped.
Is it a good time to buy gold?
In the last few years, equity markets (risk asset class) have delivered superior relative performance. Gold to that extent has underperformed in rupee terms too (despite INR depreciation over that period).
“During the last couple of quarters, the investment demand has increased at lower levels mainly due to the rise in oil prices and geopolitical tensions have made investors to allocate investment into gold. Further, due to a rise in geopolitical instability, global oil prices and higher inflation expectation, the demand for gold at lower price points could remain. We, therefore, recommend investors to look at gold as part of term cover to their financial portfolio. Also, we suggest an allocation of 5-10% into gold and accumulate at every dip,” says Lakshmi Iyer, CIO (Debt) & Head-Products, Kotak Mutual Fund.
Some financial experts, however, believe that investing in gold does not make sense for Indian investors. Firstly, “gold as an asset class is over-owned by Indians. Historically a large part of our domestic savings has always been invested in gold. Gold has been bought and gifted during family occasions like marriages, child birth and other functions. It has also been bought during festivals like Dhan Teras and Akshaya Tritiya. So buying more gold will not add any value to a large number of investors,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Secondly, as an asset class gold has historically given us returns of around 5-7%, which barely covers inflation. This is especially low when we compare it with other options like equity, mutual funds and real estate. Thirdly, with the drive against black money a major reason of demand for gold is being closed. In the Indian context besides security, the other reason for buying gold has been to invest unaccounted cash. After demonitisation and other initiatives to attack and diminish the parallel economy, one of the two prime reasons for investing in hold has become nearly extinct. This will have an impact on not just demand but also the buoyancy in the global gold market.
“It may be noted that India along with China contributes to over 50% of the global gold demand. With the systematic and significant reduction of demand here, even the global prices are not likely to go up the way they were doing in the past. Hence, for all the above-mentioned reasons, I feel Indian investors should stay away from gold. This is even more true in the current circumstances when our equity market has started a very buoyant and secular bull run,” observes Kapur.
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Where to invest?
If at all someone still wants to invest in gold, then experts advise gold ETFs as a safe and easy way to do so. Physical gold has issues of purity, storage and security. Among the various non-physical options, ETF is supposed to be a better option as it is regularly traded and has very low investment and holding charges.
Benefits of investing in Gold ETFs
According to Iyer, some benefits are:
# Hedge against inflation: Gold is considered a safe investment because it can be used as a protection against currency fluctuation and inflation.
# Simple trading: You need to buy a minimum of 1 unit of gold – equal to 1/10th of 1 gram or 1 gram of gold – to start trading in gold ETFs. Buying and selling the units works just like equities – you can trade through your stock broker or the Fund House.
# Open trading: Gold prices on the stock exchange are publicly available. You can check the gold prices for the day or the hour without any confusion.
# Easy transactions: You can buy and sell gold ETFs at any time of the day – when the stock exchanges are open.
# Inexpensive: Gold ETFs listed on the stock exchange have no entry or exit load for purchase or sale of units. You have to pay only brokerage charges to the broker.
# Secure investment: Gold ETFs are an easier investment than physical gold as there are no concerns over theft, secure storage or payments such as locker charges or making charges.
# Safe asset: Gold prices do not usually fluctuate very heavily. Even if your returns on equities decrease, gold ETFs could prevent you from sustaining big losses.
# Portfolio diversification: Gold ETFs are a good way to add diversity to your portfolio. Amid unstable market conditions, a diversified portfolio can give your better returns and reduces your risks.
# Loan collateral: Your gold ETFs can function as collateral security if you want to borrow from financial institutions.
Apart from gold ETFs, investors can also buy gold in paper form by buying GOI Sovereign Gold Bonds. The Sovereign Gold Bond Scheme 2017-18–Series I will remain open for subscription till 28 April, 2017 and bonds will be issued on 12 May. The issue price of the bond has been fixed at Rs 2901 per gram. These bonds are available through banks, Stock Holding Corporation of India Ltd, designated Post Offices, and recognized stock exchanges.
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Precautions to be taken while investing in gold
If you are investing in physical gold and related instruments, then you need to take some precautions as well. You need to keep in mind that gold is a physical asset. Hence, it tends to get linked with cyclicality of commodities as well. Besides, gold as a perceived safe haven asset class tends to have a negligible/negative correlation with risk asset class like equity. India has been a land of gold lovers and most equate gold as akin to financial investments.
“Also, given the past underperformance of this asset class, it may be natural to see some support in gold prices in the near term. However, one needs to note that INR has been on a strong footing and any incremental INR appreciation would only reduce the INR value of gold holdings and vice versa,” says Iyer.