Festivals should not be an excuse to invest in gold

Don't keep more than 5-10% of your asset allocation towards gold

Gold has definitely lost its sheen. Let’s consider the asset’s price performance first. In the past one year, international gold price has corrected 8% and the price in rupee terms has moved lower by 11%; now you can buy 10g of gold at around 26,800 compared with 30,000 a year ago.

Despite the fall in price, the demand for gold hasn’t improved. Data from World Gold Council (WGC) shows that in the second quarter (April to June 2014) of the current calendar year, the volume demand for gold fell by 185 tonnes compared with the same quarter last year. Globally, jewellery demand was lower by 30% and investment demand has all but slumped; demand for bars and coins was down around 56% and exchange-traded funds (ETFs) continue to see redemptions compared with the same quarter last year. The report also shows that in India, in terms of volume, both jewellery demand and demand for bars and coins fell 18% and 67%, respectively, for the above-mentioned period. Domestic ETF data, too, corresponds to the lack of interest in the yellow metal; Association of Mutual Funds of India data shows that for the past 15 months, at a stretch ETFs have seen net redemptions totalling 3,000 crore.

Why is everyone bearish on gold?

Gold prices are determined globally and there are many variables which affect pricing. For one, it’s widely believed that gold prices move in the opposite direction of the US dollar. Given the recovery in the US economy, the US dollar is expected to strengthen over the next few quarters making it a more attractive asset and as a result gold gets neglected.

Secondly, gold is considered to be a safe haven investment in times of high inflation or slowing economic growth. For the time being, both these conditions are taken care of globally.

Lastly, the recent rally in risk assets such as equity has meant a shift of money from gold to these assets.

As a result of a culmination of all these factors, demand for gold has suffered and analysts are not expecting the trend to change in a hurry. However, after the sustained correction in international prices of gold, analysts feel that we may be at the bottom. According to Nitin Nachnani, research analyst, Geojit Comtrade Ltd, “Internationally, gold has been correcting from the levels of around $1,300 per ounce, and after this large correction, we don’t expect a further dip immediately as all the risk factors have now been priced in. Before any upward movement starts, we expect prices to consolidate at the levels of 1,200-1,240 per ounce and around 27,500 per 10g on the domestic front."

Until last year, India was the largest consumer of gold jewellery; however, demand has slowed down. In part this is because of the recent sanctions on import of gold and the artificial price premium it created. The official jewellery demand has fallen. The sanctions were imposed in an effort to lower a soaring current account deficit that India was battling last year. Even though the imbalance has been rationalized, the sanctions remain and as a result gold imports in the past few months have been relatively lower. Nachnani feels that the import duty of 10% on gold is unlikely to be lowered in a hurry as demand hasn’t fallen to that extent yet and the festival season demand will be high, albeit mostly through jewellery rather than bars and coins.

Jewellery or investment?

According to a recent note by Kiran Kumar Kavikondala, director and chief executive officer, WealthRays Securities, fundamentals are weak for gold and prices could decline more in the near future; they expect gold futures to trade in the range of 25,000-25,500 for the next 6-12 months. This festive season, if you must buy gold, don’t look for bars and coins; it’s better to look at buying jewellery. So, buy gold if you need jewellery but not as an investment.

Prices aren’t likely to go up in a hurry, so, there is an opportunity to buy jewellery when the price trend is downward. A slump in overall demand might also enable you to negotiate hard on making charges to lower the overall cost.

Moreover, gold usually displays a strong negative correlation with risk assets such as equity. Now that equities are doing well, gold, as a hedge, will lose some sheen. You have to remember that investing in gold is more about giving your portfolio a safety net against inflation rather than chasing a capital gain. As an asset, gold offers no earning potential as it doesn’t have any interest payout or dividend attached to it So, don’t keep more than 5-10% of your asset allocation towards gold. It’s also not accurate to include your jewellery in the above as you are unlikely to book profits in jewellery until you are in dire straits.

The big picture shows a definite demand declining trend; according to WGC data, demand peaked in 2011 at around 4,700 tonnes and fell to around 4,065 tonnes in 2013. This year, too, doesn’t look encouraging.