Golden Days- Business News

Golden Days

Gold had done well this year. Should you buy this festive season?

 Renu Yadav   
Golden Days

Every year, between October and December, the demand for gold rises during festive and wedding seasons. International gold prices have risen 15 per cent and hit the psychological mark of $1,300 per ounce till September 15 this year. Domestic prices rose 8 per cent to Rs 30,388 per 10 gram during the period. The difference in international and domestic prices is due to fluctuations in the rupee-dollar exchange rate.

Many people buy gold during festive season. The question bothering them would be whether they will make money by investing in gold this year. Let's first look at factors that are driving up prices.

Geopolitical Tension

Gold is considered a safe-haven asset. Its demand rises during periods of economic/political uncertainties. Geopolitical worries have escalated due to North Korea's nuclear tests. The US President, Donald Trump, has vowed a stern response. This has increased the risk of a possible war that can destabilise markets and increase demand for safe-haven assets.

Weakening Dollar

US dollar and gold have an inverse relationship -- both compete for a safe-haven status. The dollar has underperformed major currencies this year with the dollar index (which shows the value of the dollar against other major currencies) slipping 8 per cent this year due to poor economic data in the US such as low inflation and worse-than-expected non-farm payrolls figure. The US consumer price index has been trailing the forecast for some months. This may lead to Fed not increasing the rates at the same pace as anticipated, thus negatively affecting dollar and supporting gold prices.

"As the Fed prepares to shrink its $4.5 trillion balance sheet from October, the bank could also lower its prediction for the pace of further rate hikes as price increases stay muted. The fact that the Fed members lowered their forecast for their own future Fed funds rate indicates that the Fed may again kind of undershoot what it is predicting to do for rates," says Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum AMC. The damage caused by Hurricane Harvey and Irma has also impacted the value of the dollar.

The June quarter saw an increase in demand for gold in the domestic market, as per the World Gold Council. The investment demand rose 26 per cent to 40.7 tonnes compared to the previous year. The gold demand for jewellery rose 41 per cent on a year-on-year basis to 126.7 tonnes from 89.8 tonnes last year.

One reason was implementation of the Goods and Services Tax from July 1. Traders and jewellers stocked gold in May-June ahead of the expected imposition of the 3 per cent GST on gold sales. Experts say this will impact the demand for physical gold in the coming quarters. "As consumers and importers brought forward purchases to Q2, the demand will likely be subdued for a few weeks. Stock is plentiful across the supply chain and consumers who have recently purchased are unlikely to do so again in the short term," says a World Gold Council report.

Buy on Dips

Any uncertainty will be good for gold prices. However, experts believe that most of the above mentioned factors have already been priced in. Still, any rise in threat levels in the Korean peninsula will create further uncertainty, lifting prices. Any dip can be considered an opportunity to buy.

"Most factors regarding the uncertain environment have been factored in and a correction will likely lead to some bargain hunting, which one may see when gold prices return to the sub-Rs 29,000 mark in domestic markets," says Prathamesh Mallya, Chief Analyst, Non-Agri Commodities & Currencies, Angel Commodities Broking.

"If the macroeconomic scenario stays positive and global geopolitical tensions ease off, gold will not rally. In fact, it can correct 7-10 per cent till the levels of 28,000-26,500 in rupee terms and 1,265 - 1,210 an ounce in dollar terms," says Jateen Trivedi, AVP, Commodity Research, Bonanza Portfolio.

The rise in gold prices may be limited from here on if the geopolitical tensions don't escalate. But from an asset allocation point of view, it is an important to have some allocation to gold for portfolio diversification. "The world is going through an uncertain period, both with respect to the economy and geopolitics. The fallout of geopolitics globally seems to have capped the downside. Given the macro backdrop, gold will be a useful portfolio diversification tool, helping reduce the overall portfolio risk," says Mehta of Quantum AMC.

Weigh Your Options

Physical gold: People have traditionally bought gold in the form of jewellery, bars and coins. But this involves making charges and other incidental costs and is thus not advisable for investment purposes. Also, you will now be charged 3 per cent GST on physical gold as well as on making charges, which will not be refunded by the jeweller on return of jewellery.

Gold Exchange-Traded Funds or ETFs: These are basically mutual funds listed on exchanges and traded like shares. You need to have a demat account to invest in gold ETFs. Gold ETFs have delivered a return of around 5.5 per cent this year till September 15. You can buy and sell gold on exchanges through ETFs on any trading day. So, it is a good option for those who want liquidity in their portfolio. There is also the option of buying small quantities (as less as one gm). There is no need to pay storage cost (bank locker fee) too.

However, there is an expense ratio of around 1 per cent, apart from brokerage charges.

Sovereign Gold Bonds: Sovereign gold bonds are issued by the Reserve Bank of India. You can buy a minimum of one gram (equivalent to one unit) and up to 500 gram. You can invest when the issue is open or buy from the exchange, where these bonds have to be listed. The bonds provide interest of 2.5-2.75 per cent per annum on the amount invested. Plus, capital gains are not taxed when redeemed on maturity after eight years. Indexation benefit is available, just like in other gold investments, if redeemed before maturity.

However, gold bond is not a very liquid option as you may not find many takers before maturity. Redemption to the government is only possible after the fifth year. These are meant for those with a long holding period.