Gold will remain below Rs 30,000 in coming months. Here's why

Analysts expect a correction of 5-15% in coming months

The uncertainty in gold prices seems to be settling  after conclusion of the US polls. The metal is expected to see a correction soon and in the medium term (one to two years), investors can expect moderate returns.

After the recent currency demonetisation, many jewellers had started quoting a premium on the wholesale gold prices for those buying in cash. This led many individuals to wonder if there could be a rally in gold going forward. “This was a temporary event, which has settled down after the government increased scrutiny. Individuals can buy gold at the prevailing market price (without additional premium) if they offer their PAN (permanent account number) details and pay via card or currency currently in circulation,” says a Mumbai-based jeweller.

Negative triggers for gold outweigh positives ones. There are expectations that the US Federal Reserve will raise interest rates in December, which has led to a stronger dollar. The dollar has an inverse relationship with the yellow metal. The prices, therefore, corrected recently. “Gold prices usually see a rally during uncertain times. Donald Trump winning by a clear majority has put the uncertainties surrounding the US elections behind,” says analyst Bhargava Vaidya of B N Vaidya Associates.

Recent economic data has also been upbeat. “The recent unemployment data from the US was also positive leading to correction in gold prices internationally,” says Ajay Kedia, director, Kedia Commodity.

Vaidya feels that gold will remain below Rs 30,000 per 10 grams in the coming months. Gnanasekar Thiagarajan, director at Commtrendz Research, says that depending on rupee movement, gold can even fall to Rs 26,000 per 10 grams. In India, the international price movement of gold usually has limited effect because of dollar-rupee conversion rates. But, Thiagarajan is positive on gold from one-two year perspective. Based on the current communications, it is expected that the policies adopted by Trump will lead to a rise in inflation, which could increase investors’ interest in the yellow metal.

Investment advisers suggest that individuals should only look at gold to diversify portfolio. In an environment where global uncertainties are affecting the Indian equity market, an investor can keep 10-15 per cent of the portfolio in gold. “Sovereign gold bond (SGB) scheme is the best way to invest in the metal,” says Kedia. Individuals get to invest in gold at wholesale prices. SGB gives investors an annual return of 2.50-2.75 per cent on the initial investment, paid every six months. There is also exemption from capital gains tax on redemption; the individual doesn’t need to spend on storage and one can even take a loan against the bonds.

 

If you wish to invest in the SGB at present, you’ll need to buy on stock exchanges, as there’s no ongoing scheme. The quoted price on an exchange, however, is at a premium to spot gold prices. Analysts suggest that investors should calculate yield to maturity before buying SGB on an exchange.