Prices rose steadily for over a year, and gold gave good returns. It is advisable to invest on a periodic basis through gold bonds. Many experts feel gold will continue to be strong for some time now.
Experts say unless you are buying for jewellery consumption, the investment should be through bonds, a more attractive option than owing physical gold. The relentless rise in the price of gold over the past year has left investors unsure. While existing investors wonder whether they should exit with significant capital gains on their investments, new investors are unsure whether they should invest at current levels.
On Wednesday, the United States Federal Reserve signalled it would keep interest rates near zero until 2023. If the dollar index remains weak and leads to higher inflation going forward, many feel it would result in gold prices staying firm or even rising — until a Covid-19 vaccine is in sight and the global economy shows signs of recovery.
How have gold prices moved?
Prices started to move upward from May 2019, culminating in an over 50% jump in a little over a year — from $1,250 per ounce to $1,900-plus now. In India, gold prices went from around Rs 32,000 per 10 g to nearly Rs 52,000 during the same period, a nearly 62% return. Since gold is an imported commodity, the depreciation of the rupee added to the returns enjoyed by Indian investors.
In dollar terms, gold peaked around $2,080 an ounce on August 7; the Indian price in market touched Rs 58,000 per 10 g that day, as gold traded at a premium of nearly Rs 2,000 compared to the price on commodity exchange MCX.
Since then, prices have eased around 7% in the international market, and around 10% in the Indian market. The fall has been sharper in India as the rupee appreciated by more than Rs 2 during this period. With the cooling off in international prices from peak levels, the premium on physical gold has now vanished. Demand is expected to pick up in India closer to Diwali.
Why have the prices risen?
The biggest reason for the rise over the last five months has been the pandemic, its impact on businesses and economies, and growing concern about the global recession. Concerns around negative growth rates have pushed central banks and big investors towards gold.
The weakness of the dollar, which has an inverse relationship with gold, has been the other reason for the rise in prices. As central banks including the Fed cut rates and injected huge amounts of liquidity to support the economy, the dollar weakened and gold rose.
Traditionally seen as an asset class that preserves its value, investment demand for gold has been going up in line with rising uncertainty. Expansion in the paper currency typically tends to push up gold prices, with the higher prices being supported by major buying by leading central banks of China and Russia over the last two years.
While gold does not by itself produce economic value, it is an efficient tool to hedge against inflation and economic uncertainties. It is also more liquid when compared with real estate and many debt instruments.
Could prices rise even more?
There is a broad sense among commodity traders and experts that gold may remain strong — this is due to factors including rising Covid-19 case numbers, and the Fed’s signal on keeping interest rates low for the next three years.
“Both these factors— no medical solution for Covid-19 yet, and the Fed’s decision to keep rates near zero — are set to keep gold prices firm. The selling pressure in gold will come once a medical solution for Covid-19 is found,” said Hareesh V Nair, head of commodity research at Geojit Financial Services.
Some analysts, however, feel gold may not see much of an upside from its current levels. Jamal Mecklai, CEO, Mecklai Financial Services, said two months ago, people felt the dollar was going to collapse, which led to gold shooting up. “Now it has come down. There has to be a fundamental crisis in dollar for gold to rise from current levels, and I don’t see that.”
So is gold a good investment for you?
While trading in gold may not be a good idea because of the current high prices, experts say retail investors can buy gold periodically. Financial planners say gold should continue to be between 5% and 10% of an investor’s overall asset allocation.
“The strategy for retail investors should be to invest on a periodic basis— monthly or quarterly. But one should avoid making a lump-sum investment in gold at this time,” Nair said.
Financial advisors say gold should not be seen as a short-term asset. “Gold is a generational asset, and after a couple of decades it won’t matter at what price you purchased it. People are investors but they think like traders even when they are buying a long-term asset,” said Amar Pandit, CFA and founder of Happiness Factory, a financial advisory platform.
A cut in interest rates by RBI has led to a decline in interest rates on small savings and term deposit rates of banks. Many analysts argue that gold buying can be initiated around levels of Rs 50,000 per 10 g, which is near $1,900 per ounce as the spot price that it is expected to hold. Some see gold climbing to Rs 65,000 per 10 g, or around $2,400 per ounce, by December 2021.
How should you invest in gold?
Almost everyone agrees that unless you are buying for jewellery consumption, the investment must be through sovereign gold bonds. They offer investors price appreciation along with a fixed 2.5% coupon per year in holding them; also, they are in the form of paper or demat and issued in the name of the investor, thus taking care of concerns around security.
While the interest earned on gold bonds is added to the holders’ income and taxed according to their slab rate, any capital gains at maturity is tax-free, making them far more attractive compared to owning physical gold.
Gold bonds have a maturity period of eight years but investors have the option to exit after the fifth year. To offer greater liquidity, the bonds are listed on stock exchanges within a fortnight of being issued, and can be traded. However, trading volumes depend upon liquidity in the secondary market.
What if gold prices crash?
Analysts caution that one should hedge against a crash as gold prices, like those of other commodities, tend to move in long cycles. Whenever the recovery picks up, investors will start allocating more funds to risk assets like stocks, real estate and bonds, and pull out from safe havens such as gold, US dollar, government debt, and Japanese yen. Historical trends show that when equity and risk assets start moving upward, gold typically falls, as was the case from 2011-15.
“A investor should watch levels of $1,900 and $1,800 (per ounce) on short and medium term basis. A fall below $1,800 would indicate the start of a downtrend in gold prices. Those should be exit levels or stop-loss levels, depending upon the risk appetite, for investors who enter at current prices,” said an expert with over two decades experience in gold trading.