The year has begun on an optimistic note for gold, up three per cent in a fortnight when most other asset classes are down, with some like crude oil having plunged over 20 per cent and equities down sharply. The unusual thing about gold's rise is that the dollar index has not fallen during the period. Normally, they move inversely. This suggests gold is emerging as a safe bet in times of uncertainty.
Uncertainties could emerge in various forms, from terror attacks or crashing oil prices or the G7 central banks losing their credibility. Although many still see the recent spike in gold as temporary given that the yellow metal is seeing resistance at higher levels, voices have started emerging in support of gold. If uncertainties increase, some experts believe gold could rise as much as 20 per cent in 2016.
Bernard Dahdah, precious metals analyst with London-based Natixis Commodity Research, says, "In 2016, gold could break $1,000 per oz in normal circumstances." However, he has also indicated in his report released two days ago that in case of any uncertainties due to conflict in the West Asia, the price could spurt to $1,300 per oz, 20 per cent higher than the current price.
Wood also draws an inference from the Russian central bank's thirst for gold during 2015. Russia increased its official gold reserves by 186.6 tonnes (of which 77 tonnes were bought in the September quarter) in the first 11 months of 2015 to 1,393 tonnes, after buying a net 171.6 tonnes in 2014. "There are obvious geopolitical implications to this buying," he said.
In India, too, gold prices have strengthened. In the first fortnight of 2016, the price of gold in Mumbai has increased by nearly three per cent and is trading around Rs 25,900 per 10 gm. Gold looks more bullish as the rupee is weakening against the dollar. Bullion is certainly emerging as a safe bet for Indian investors, as most other asset classes are facing an uncertain future, including equities and real estate.
Sudheesh Nambiath, lead analyst with GFMS TR, says, "Gold's price in rupees is expected to yield positive returns this year, ending years of negative returns. Compared to the price at the start of the year, gold is likely to give a return of 10 per cent in rupee terms. A weaker rupee can contribute majorly to its appreciation."
A fund manager tracking gold at the another research house says on condition of anonymity, "Our house view is that the rupee could depreciate further, as fresh inflow of foreign money will remain questionable, while the brewing crisis in the West Asia will not let the international gold price to fall below $1,050 per oz. Both read together, gold in Indian currency has bottomed out at Rs 25,000 per 10 gm, the level seen late last month."
In the past six months, gold recovered sharply after briefly falling below Rs 25,000 per 10 gm in the spot market, suggesting a floor has been made. Even if gold breaks $1,000 per oz in international markets, a weaker rupee might not allow the local price to fall much.
If investors buy gold now and plan properly they have not much to lose. Experts advise investors to buy physical gold and deposit it with banks under the monetisation scheme to earn an additional 2.5 per cent per annum return as interest. Buying gold bonds is another option. Such alternatives are not available to international investors.