Don't rush to invest in gold

If it is for use as jewellery, it would make sense to accumulate when prices touch Rs 25,000 per 10 g

With gold prices falling 20 per cent in the past year, investors would be wondering if it is a good time to buy it or further fall is expected. The answer to both is “yes”.

Gold prices are likely to be under pressure for some more time. “With favourable conditions for an appreciating dollar, and given the strong correlation between gold and the dollar, we would not be surprised if the price of gold dropped below $1,100 per ounce during the first half of 2015,” says a report from Natixis Commodities Research.

But a stronger dollar may make gold a viable investment option for Indians still. Mostly from the consumption perspective.

The important piece of advice: “We expect in rupee terms, gold could drift towards Rs 25,000 per 10 gram. Investors can start accumulating gradually between Rs 25,000 to 25,500,” says Sudheesh Nambiath, senior analyst, precious metals, GFMS, Thomson Reuters.

If you are tempted to buy gold now, keep in mind the purpose. If it is for use like jewellery for marriage which is a year or two away, this would be a time to accumulate with purchase advisable at every fall. However from an investment perspective, one could wait. Globally, investors are consistently selling gold. In fact, holdings of the US’ largest gold ETF were down 45 per cent in two years.

Global investors are not buying because the need for safety by parking money in gold has come down due to falling crude oil prices and overall bearish mood in commodities. So, there is comfort that inflation will not be going up in a hurry.

Indian investors, though, need to keep an eye on several risks which could swing either way. First is the exchange rate movement. If rupee doesn’t weaken than gold prices in India will also fall in line with global trends. Over the last 40 years, gold seldom given negative returns in India, but that is because the currency has depreciated consistently.

Another risk could be possible import duty cut as 10 per cent custom duty on import of gold at present is incentivising gold smuggling. If duty is cut by two per cent, price will fall to that extent. Although how and when this will happen is uncertain. “There might be marginal duty cut. But I don’t think there is any massive rush to revive gold imports. Gold is an unproductive investment. And, frankly, we still can’t afford large gold imports, and therefore we should not encourage that, says Madhusudan Kela, chief investment strategist, Reliance Capital.

The support to prices will also come from higher premiums due to lower supplies. With several restrictions on import of gold over last one year, gold has been quoted at a premium for physical delivery, which was around 8-9 per cent a year ago. Even now, the premium is at 2 per cent. Natixisn Commodity Research says that mines’ output growth has been slowing which will eventually restrict supply.

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