Business Today

Go for gold in 2016

Were one to ask financial experts to name the best asset class in early 2016, few would have hit the right answer: Gold

twitter-logo Jinsy Mathew        Last Updated: February 26, 2016  | 16:06 IST
Photo: Getty Images
Photo: Getty Images

Up, Up & Away?

 

  • The rise in gold prices in international markets since the start of the year has been too quick to comprehend
  • On a year-to-date basis, the yellow metal has rallied 14% in dollar terms and nearly 18% in rupee terms, making it the best asset class to be in
  • In comparison, the bond fund yielded 8%; the highest yielding fixed deposit, a return of 7.5%
  • When it comes to equity, benchmark Nifty had a meltdown of nearly 10%
  • The appreciation in rupee terms has been sharper due to the weakening rupee which has already lost ground by nearly 3.5% against the US dollar
  • The fall in global equity markets, including in India, has whetted any serious appetite for the asset class
  • The risk-averse mood among the investors made sure that gold once again stood its ground as a safe-haven metal
  • However, experts are divided on whether this rally is sustainable

Why the rally may continue

China slowdown

There have been reports that China's GDP is likely to slow down to 6% in 2017 from the 6.5% projected in 2016, with growth unlikely to rebound in the near term. With Chinese equity markets in the doldrums and the real deposit rate turning negative, Chinese gold buying is expected to pick up. This is likely to fuel the rally in the coming quarters.

Uncertainty in US rate hikes

Given low inflation fears and instability in global financial markets, the US Federal Reserve is unlikely to go ahead with a rate hike in March. From the earlier talk of two hikes this year, market pundits have scaled down the expectation to a single hike or none at all. A prolonged period of low rates will prove to be supportive for gold.

Negative interest rate

Gold proved to be a safe bet all over again thanks to the negative interest rate policy adopted by several of the central banks in Europe, Japan, Sweden and Denmark. There is speculation that such a policy stance will actually backfire instead of helping the struggling nations because it will only distort financial markets. Given the integrated financial ecosystem across the globe, asset classes have turned sensitive to central bank policies.

Final take

  • The factors mentioned above cannot be wished away
  • Weakness in dollar index due to geopolitical tensions will keep the interest in gold alive
  • In case of a global slowdown, which looks more likely now than last year, the yellow metal will definitely shine brighter
  • In India, gold will scale back to Rs 30,000 and upward per 10 gram;primarily due to the weak rupee
  • Gold ETFs will continue to be the best way to invest. Regular investments based on financial goals are advisable.
  • Investment in gold helps add diversity to your portfolio.

Expert view

Price pattern is indicative that upwards momentum is likely to continue. So it is worth buying on dips now as the prices are likely to tread higher towards Rs 32,200/10 gm ($1,350 an ounce) from a medium-term perspective.

Jayant Manglik, president, retail distribution, Religare Securities

All the current factors which are driving the yellow metal price are likely to remain unchanged, leading to further upside. This goes with a caveat-volatility is the new constant. A gradual increase is desirable and more sustainable than sudden spikes or drop in prices.

Keyur Shah, CEO, precious metals business, Muthoot Pappachan Group

 

Follow the writer on Twitter @jinsymathew

 

Youtube
  • Print

  • COMMENT
BT-Story-Page-B.gif
A    A   A
close