Indians have always been one of the biggest consumers of gold in the world, mostly in the form of jewelry, and come the occasion of Akshaya Trithiya (which according to the Hindu calendar is considered an auspicious day to invest) you would be hard pressed to find a jewelry shop that is not bursting at the seams with eager customers.
However, with gold prices rallying almost every day and recession at our doorstep, India has seen a considerable dip in the demand for gold. This prompts the question, "Should you invest now? Will gold prices continue to go up or will there be a dip from the current levels?"
Should you invest in gold now?
Just like any other investment avenue, investing in gold has its own advantages and disadvantages. For now it is advised to wait. Two to three months down the line, gold prices are expected to decrease from the current levels. Investors planning to invest in gold can buy then.
As advised for other investments, gold investments should also be staggered ie, spaced out to average your cost of acquisition.
Indians have always bought gold on auspicious days and on the occasion of Akshaya Trithiya, people are bound to buy gold. For those of you who will be buying gold, it would be best to buy in small quantities and preferably in the form of gold bars or coins. Gold prices are expected to come down and you should wait a while to invest more. Investors who buy gold through Gold Exchange Traded Funds (ETF) should invest systematically every month in order to average their cost and start building a portfolio in gold.
Why should you wait?
Gold prices have moved up in recent times and now would not be the best time to invest in the previous metal. And this is why:
Weakness in the financial market
Gold has always been attractive during times of turmoil in the markets. With the metal being negatively correlated to most of the financial instruments like equity markets, debt markets, real estate, it has always being considered a safe haven to invest in times of weakened financial markets.
Geo-political concerns
Any geo-political problem makes people turn towards gold. Why? As history has shown, political coups, collapsing of economies and currency can spell doom for investors, however, gold is the most liquid asset in the world, easily redeemable without any time delay.
Inflation and interest rates
Rising inflation rates typically push gold prices up. Also, interest rates and gold prices tend to be inversely related. With interest rates dropping in recent times, gold prices have been rising. Even during deflation where prices contract and the economy slows down, it has been seen that demand for gold increases. So, during excessive inflation or deflation, the demand for gold increases.
Central bank demand
With gold being a safe haven and the dollar losing its value, the demand for gold from central banks also increased.
Currency fluctuation
The recent US dollar fluctuation around the world has had many people turn towards gold. You might argue that the US dollar rates have increased of late but that is primarily due to the fact that foreign investors were pulling money out of the Indian economy and hence the demand for dollars led to the rise in dollar price vis-a-vis the Indian rupee. The recent downturn of economies around the world has propelled investors towards gold.
Demand and supply
The demand for gold has been increasing and there is a decrease in mining of gold. Gold mining has decreased by almost 40 per cent due to the cost of mining, legal problems and others. The supply of gold in the gold market is mainly of gold bullion held by central banks around the world. New gold mining has decreased considerably leading to imbalance in the demand-supply equation.
What does the future look like?
The above factors have propelled gold prices to touch new price peaks in the recent past, which brings us to the question, "Where are gold prices headed from this point on?"
It will not reach as low as $500 (approx Rs 24,800) or $550 (approx Rs 27,300) per ounce, but prices will surely come down from current levels and will stabilise at around levels of $800 (approx Rs 39,760).
As gold prices have touched very high levels, central banks around the world are expected to sell gold. They will sell to infuse more liquidity into the system and accommodate bailout packages announced by their governments. This will help bring prices down as supply increases.
However, the future of world economies is still looking gloomy and gold being safe investment will continue to attract investors. As such, gold prices are not expected to fall drastically.
Gold is an important part of any portfolio and ideally at least five per cent of your portfolio should be in gold. Gold prices have always shown stability over the long run and proved a good hedge during troubled times
The writer is a financial consultant, and can be reached at dhanplanner@rediffmail.com.