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It’s that time of the year when Indians step out to make their annual gold purchases. Though opportunities of investing in other financial assets have opened up over the years, Indians have always associated gold as ‘dhan’, or wealth, thus the buying on Dhanteras. Last Samvat was good for Indian gold buyers, with the metal giving a 16.8% return during the year.
Gold investment seems to be justified, as Indian equity markets gave a return of only 6.9% during the period.
As other asset classes developed, the charm for gold as an investment avenue reduced. Legendary investor, Warren Buffett, is a known gold critic who does not like investment in the metal, as it does nothing. According to Buffett, it’s a lot better to have a goose that keeps laying eggs (investing in businesses or farmland) than a goose that just sits there (gold) and eats insurance and storage and a few things like that.
Such a logic, though, has never deterred gold bugs. Gold, according to them, has always been storage of value. Over the past century, it has increasingly become an index of fear, a destination to park your funds at a time of crisis.
Given this background, the answer to the question on whether one should invest in gold in the new Samvat can be found on the uncertainties that can crop up during the year.
To start with, Presidential elections in the US are just around the corner. In a recent report, GFMS Thomson Reuters said: “A Trump victory (in the US) could spark a rally to $1,400 an ounce, even $1,500, but a victory for Clinton would likely see the price ebb.” Markets feel uncertainty would increase with a Trump victory.
Irrespective of who wins, the bigger danger for markets is what the US Fed is likely to do. Expectations are high that US Fed would start increasing interest rates. A scenario of rising interest rates in the US has historically been good for gold and bad for equities.
To add to the problems in the US is the European crisis, especially in the UK. The full impact of Brexit will be felt during the year.
The falling demand for gold jewellery in Asia, mainly India and China, has resulted in physical gold being in excessive supply. This is expected to put pressure on gold prices going forward. Physical gold had an excessive supply of 250 tonnes, the largest since 2005. Jewellery consumption is at a seven-year low in China and a 13-year low in India.
However, there is some good news for gold bugs. China’s import of gold has increased in four months as the yuan has retreated. The world’s biggest consumer of gold increased its imports from Hong Kong in September, as investors sought to diversify their portfolio on prospects of further currency weakness.
Goldman Sachs in a note said that further losses in China’s currency, as well as investors’ concerns over the outlook for the nation’s property market, might spur gold demand in China, adding the third dimension for a bull case for gold.
While there is a bull case for gold in the coming Samvat, some might want to know the possible returns that could be expected. Mark Mobius, executive chairman of Templeton, says gold is expected to advance by as much as 15 per cent next year, as Fed goes slow in increasing interest rates and the dollar remains subdued. Now, that’s a good return in a falling interest rate scenario in India.
