Over the past one year, gold has regained its lost shimmer. Between November 18, 2015, and November 17, 2016, gold exchange traded funds (ETFs) returned 16 per cent, outperforming other asset classes. In comparison, gold ETFs witnessed a negative return of 1 per cent over three-year and five-year periods.
In the domestic market, gold prices moved up from Rs 25,000 per 10 gm to Rs 31,000 during the period. In dollar terms the prices moved up from $1,100 to $1,300 per ounce. There were a variety of factors contributing to the rise - from a fall in global equities and concerns over economic growth to inflows in bullion funds that led to buyers' interest for gold on dips. For the uninitiated, the yellow metal's bull-run ended in 2013, after a 12-year rally. Since then, it has lost 28 per cent of its value. And, experts believe gold prices could fall further in 2017.
Spot prices of gold, globally, have already corrected by about $100 from $1,337 on November 9 to $1,230 per ounce at present. In India, MCX gold futures have fallen from Rs 31,400 per 10 gm to Rs 29,300 during the period.
"Following the recent rise in global bond yields, especially in the US, and some unwinding of the carry trade (where people borrowed at a low interest rates in the US and invested in high-yielding assets), we are seeing corrections in gold prices," says Lakshmi Iyer, Chief Investment Officer, Debt, and Head of Products, Kotak Mahindra AMC.
According to Prathamesh Mallya, Senior Research Analyst, Commodities and Currencies, Angel Broking, US President-elect Donald Trump's policy initiatives through higher infrastructure spending and tax cuts will not only boost economic growth in the US but will also result in a stronger dollar. This will lead to further correction in prices. The US dollar and gold tend to move in opposite directions - a stronger dollar implies lower gold prices, and vice versa. Says Iyer: "We could see flattish gold prices till markets get a sense on the policy stance of the new President."
Impact of Demonetisation
According to market estimates, India has imported $1 billion worth of gold, or about 30 tonnes, in the seven-day period following the demonetisation of high-value legal tenders (Rs 500 and Rs 1,000) on November 8, compared to the average monthly import of 30 tonnes since February. High demand also resulted in a surge in gold prices. Mallya says a big chunk of black money finds its way into gold, and demonetisation ensured this money was routed through proper channels. According to Iyer, gold is a global commodity and price movements are determined by global events. "The surge in price due to demonitisation will be temporary," she adds. Gold prices have, in fact, fallen in dollar terms during the same period after the US Fed hinted at a hike in interest rates in December.
Wait and Watch
Investing in gold at current levels may not be advisable, given the recent sell-off in international markets, more so, as the US Dollar Index is trading at a 11-month high. "We may see a correction in gold prices in the near-term," says Mallya. Since Indian markets follow global trade, it will have a cascading effect in the domestic market as well. Besides, the demonetisation move is expected to be a drag on gold demand with the government coming down hard on illegal gold purchases.
According to Iyer, gold prices in 2017 will depend on US Fed action. "If the pace (of hike in interest rates) is less than anticipated, gold rally could have more wings, else it would be difficult to gather momentum." Also, considering India is the biggest importer of gold, imports would be a key determinant following the recent demonetisation move. Mallya expects spot gold prices, which are trading at $1,226 per ounce, to touch $1,080, while the MCX could see gold prices falling from Rs 29,320 per 10 gm to Rs 26,000 levels in 2017.
Kishore Narne, Associate Director, Motilal Oswal Commodity and Currency, is, however, less bearish on gold's outlook and expects a return of 15-20 per cent by 2017-end. Contrary to popular belief, he is of the opinion that Trump will be an inflation booster and, therefore, the US Fed will not be able to raise interest rates as much as it could have. "Most developed and emerging market equities have stretched valuations, leading to some consolidation of equity markets. This, in turn, opens up the place for gold as an investment." Narne believes gold could trade closer to $1,400 by the end of 2017. "In the domestic market, the rupee is likely to be weaker as fund flows slow down due to lower GDP owing to demonetisation. A weaker rupee will give a cushion for domestic prices, which could trade at Rs 32,000-odd levels," he says.
Long-term Wealth Creator
The key, believes Iyer, is to have a diversified portfolio, where gold acts as a pure 'risk cover'. In the present scenario, gold investments should be perceived as the 'last man standing'.
For some time, we may witness a period of low and negative interest rates, geo-political and economic uncertainty and low inflation. "Demand for gold in the long-run will continue to remain intact, given the traditional aspect of demand attached to it, especially in India. Therefore, people should remain invested in gold, at least, for the next five years," says Mallya, adding that one can invest in sovereign gold bonds, which are government securities denominated in grams of gold, and a substitute for physical gold.
You can buy as little as 1 gm of the yellow metal through sovereign gold bonds and earn an annual interest of 2.5-2.7 per cent, besides benefiting from the appreciation in gold prices. Further, the recent tranche set its purchase price at a discount of Rs 50 per gm. The other convenient and economical option is to invest in gold ETFs.
Gold ETFs are passive investment instruments based on gold prices. They invest in bullion, and offer flexibility of stock investments and the simplicity of gold investments. They trade on the cash market of the stock exchange, like any other company stock, and can be bought and sold at market prices. Because of the direct gold pricing, there is complete transparency on the holdings of an ETF. They also have much lower expenses compared to gold jewellery, which are more expensive.
"For those who desire to hold the physical metal, you should accumulate on every dip rather than concentrating all the purchases at one go and take the benefit of value-cost averaging," says Mallya. An allocation of 8-10 per cent of the portfolio in gold is advisable.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today