Gold shines despite price fall

Despite prices having fallen in each of the past three years, gold has over a 10-year horizon outperformed equity if the Sensex/Nifty are taken as benchmarks

Longer term equity is an asset class which outperforms all others. However, despite its prices having fallen in each of the past three years, gold has over a 10-year horizon outperformed equity if the Sensex/Nifty are taken as benchmarks. Only a good mutual fund (MF) scheme with a growth option outperforms gold. Although, if the time period in question is expanded to 15 years, equity comes second after MFs, with gold third in terms of compounded returns, show data compiled by the Business Standard Research Bureau.

Role of gold in portfolio

Gold is typically more useful as a hedge against inflation and a portfolio stabiliser. It significantly outperforms the rupee (exchange rate) and even the dollar index. It is a better asset than fixed deposit or bonds. In a crisis, equity fails miserably; being a risk asset, gold shines.

Outlook

Several researches suggest gold could go to $1,050 an ounce. If it falls below this, even $900 an ounce is not ruled out. Since India doesn't produce gold, it has remained a price taker, as its price is directly linked to the cost of import. However, in rupee terms, as the rupee has a tendency to depreciate against the dollar over a medium term, the price of gold in India is not seen as falling much below Rs 24,000-23,500 per 10g.

Things to watch

A US rate rise is discounted in the current price but the market is waiting to figure the pace at which rates will increase in the US. Crude oil prices falling, a quieter world in geopolitical terms and a slowing in major consuming regions like China are among the key reasons leading to a lower gold price. In India, apart from these, a higher duty and proposed schemes like gold monetisation and gold bonds leading to less demand for importing it are the other factors the market is concerned about. The local market will also change its perspective towards gold if and when the government starts reducing the import duty - now 10 per cent, from only one per cent three years earlier. If the duty is cut, the cost of import and, hence, the gold price will come down. However, this will take time to happen.