Why this is a good time to buy gold

Fungibility makes gold an attractive investment for many low- and middle-class Indians. Photo: AP
Fungibility makes gold an attractive investment for many low- and middle-class Indians. Photo: AP

Summary

  • Soaring prices, interest rates and the war in Europe have combined to turn the spotlight back on gold, which at 50,000 per 10 gm, is down 28.5% from its April high.

Is this a good time to buy gold?

Yes; given the global economic backdrop of surging inflation induced by the Ukraine war and rate hikes by global central banks to cool retail prices from food to fuel and power. Dollar-denominated assets fall when the dollar strengthens, with demand falling as importers pay more for buying the same quantity. However, with the US Fed hiking interest rates at the fastest pace in nearly three decades, other currencies such as rupee, euro, sterling, etc are also falling steeply. This implies gold denominated in other currencies is outperforming dollar-priced gold, protecting returns.

How did gold perform against equities?

Gold has generated 68.6% returns over five years against the Nifty’s 73.2%. However, in the past year, gold has outperformed Nifty, giving a 5.5% return against negative 3.3%. The one-year return has been partly driven by a weaker rupee, which makes imports costlier. Year to date, the rupee has returned minus 11.2% against the dollar. Gold demand is intact because wedding and occasion-based consumption (Akshaya Tritiya and Dhanteras) tends to be sticky. Also, the total number of demat accounts, though growing rapidly, is just 102.6 million for a population of 1.4 billion.

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How much gold does India import every year?

India imported an average of 842 annually over calendar 2017-2021, Metals Focus data shows. Indians consumed 771 tonnes in 2017, with 602 tonnes being jewellery demand; bar and coin demand the rest. Demand stood at 760 tonnes in 2018; 691 tonnes in 2019; 446 tonnes in the covid hit year of 2020; 797 tonnes in 2021 and an estimated 804 tonnes this year.

What are the ways to invest in gold?

Physical investments are in the form of coins and bars. Since 2015, the government relaunched the sovereign gold bond (SGB) scheme with eight-year tenor (early redemption after fifth year allowed) as one more investment alternative, other than gold ETFs, to cut non-productive investment in physical gold, a drain on the country’s valuable forex reserves. Paper gold like SGB offers a 2.5% pa interest on initial investment amount and redemption at average closing price of previous three business days.

Does gold have good resale value?

During high inflation and financial crises, one can sell jewellery at a discount of normally 5-7% to the market price. Fungibility makes gold an attractive investment for many low- and middle-class Indians. Another option is to take loans against gold from NBFCs like Muthoot Finance and Manappu-ram Finance, apart from authorized banks. Base rate of interest is 14% for Manappuram. However, depending on how high the loan to value is, extra interest of 3-12% over base rate can be charged for three-month tenor loans.

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