Don't rush to buy gold just yet

While global uncertainty has led to a rise in prices in 2016, there is still a lot of doubt regarding its future

The spot gold price recently touched a nine-week high  at Rs 26,005 for 10g. Gold has gained 3.3 per cent since the beginning of the calendar year. It is currently at Rs 25,800. But, retail investors should not be rushing to buy it just yet, unless for regular re-calibration of their portfolio, say experts.

According to Naveen Mathur, associate director (commodities and currencies) at Angel Broking, the recent rise was a knee-jerk reaction to the fall in the Chinese equities market and political trouble in Saudi Arabia. “The fundamental situation for gold has not changed much. Gold price might see a rise in the short term, but it is not a bull run yet. The later half of 2016 may be more positive for gold due to the lag effect of crude oil price, geopolitical reasons, and if inflation is high,’’ he says.

One of the biggest reasons in favour of a gold price rise is the volatility in emerging markets (EMs), both in currency and equity markets, says Kishore Narne, associate director of currency and commodities at Motilal Oswal. “Demand for physical gold will increase from China, Russia, Indonesia, Brazil and South Korea. Even if demand goes up by 10 per cent, it means an increase of 300-400 tonnes. This means an increase in gold prices. And, with foreign funds pulling out of all EM funds, they will pull out of India, too, though there are some inflows seen in India-centric funds. But, our currency, too, is weak against the dollar and this will push up domestic gold prices,’’ he says.

A clear picture of gold prices will emerge after the next meeting of the US Federal Reserve, says C P Krishnan, whole-time director, Geofin Comtrade. “If the US Federal Reserve hikes interest rates, it could put pressure on gold prices. That is a big uncertainty as of now because then dollar may go up. As of now, investors can start buying gold in small lots because as a hedge,’’ he says.

According to Narne, while the US economy is strong, the equity markets have already come off their highs and could come down still further. In such a case, gold prices could rise. “We have been advising buying gold since November 2015 because we expect prices to touch new highs in 2016. The rupee, too, is likely to be weak against the dollar. Our view is that it will touch 72 against the dollar by the end of 2016,’’ he says.

While advising investors to maintain gold at 10-15 per cent of their portfolio at any point of time, as a hedge, Mathur advises waiting for prices to fall to Rs 24,500-25,000 before buying.

For retail investors, a gold bond is the best option because it assures safety of the investment, says Krishnan. But, the low interest rates are a spoiler, as was evident in the lacklustre response to the first tranche of the bonds, points out Mathur.

Also, any cut in import duty will see the bonds losing their value further, says Narne, because the current bond price includes the import duty. “There is a section that is lobbying for a cut in import duty and if the government agrees to it in the Budget, gold bonds will decline in value,’’ he says. Instead, he suggests investing in gold derivatives for make higher returns.