Fortunes can change in a blink of an eye. The speculation on the Federal Reserve (Fed) lifting off all monetary support and hiking interest rates suppressed the movement of gold throughout 2015. Speaking about the movement of gold in the international market, it had fallen a little over 10% during 2015, registering a loss of over 21% in the last 3 year. As against to, the fall of less than a per cent in India over a 3-year timeframe looks less scary. In India, the precious metal slipped about 6.0% in 2015, despite the rising US$. Nevertheless, gold has made a smart comeback in first 2 months of 2016 by rallying around 17%. Have investors’ fortunes changed by betting on gold? Read to know more…

The only reason why gold has performed relatively well in India has been primarily due to the fall in Indian Rupee vis-à-vis U.S$. Indian currency dropped approximately 23% against the US$ over the last 3 years. Since the start of 2016, a double digit gain in gold investments in India is attracting the attention of many Indian investors.
 

Is Gold Set To Reward Investors In 2016?

Data as on March 01, 2016
(Source: ACE MF, PersonalFN Research)  

The weakness Gold experienced over last few years reflected the build-up of investors’ sentiments about global growth. As the possibility of the Fed normalising the interest rates in the U.S. gathered strength, gold weakened. For the last 7-8 years have seen gold prices rally in the U.S. Global uncertainties and hyperinflation are two other important factors that push the gold prices up.

What’s been driving gold prices up this year?
Yes you guessed right, China! They are being threatened by economic slowdown. The dwindling foreign exchange reserves and cooling down of economic activity have posed serious threats to the Chinese economy. Therefore, the on-going rally exposes the systemic weaknesses. These are the prominent reasons why gold is rallying:

 

• The world had been looking upon China as one of the rare growth spots, along with India. However, investors have been fleeing China and finding refuge in gold investments. A statement recently released by the People’s Bank of China (PBoC) stated that the Chinese foreign exchange reserves fell to 4-year low in January 2016.
• The International Monetary Fund (IMF) has already reduced global growth estimates from 3.6% made earlier to 3.4%. The sliding Chinese economy has raised serious doubts over global growth.
• Nosediving crude oil prices further confirm the concerns.
• Taking cognisance of these developments, now even Fed has been hinting that, it may go slow on the future interest rate hikes. The pace of monetary policy reversal in the U.S. has always been a crucial factor for gold prices.

 

Will gold continue its northward journey in India?
Rising gold prices in the international market works positively for the movement of gold in India. However, this would be partially offset by the relative strength of Indian Rupee against US$. Indian Rupee has been outperforming most of other emerging market currencies in its movement against US$. The risk appetite has weakened globally and flow of foreign investments has slowed in emerging markets. On this backdrop, prospects for gold look brighter. So, instead of looking upon gold as an asset to maximise returns, you should consider it as an asset providing diversification.

Sovereign Gold Bonds:
On the back of this, many are curious to know whether or not they should apply for the third tranche of Sovereign Gold Bonds. As stated by RBI, the issue would be open for the subscription between March 08, 2016 and March 14, 2016. All conditions remain just the same as those placed under first two tranches. Those who are concerned with the timing of the issue should note that, the tenure of the bond will be 8 years. Although an exit option exists post 5 years; you should ideally try to hold on to these till maturity. Budget 2016-17 provides additional incentives for investors in Sovereign Gold Bonds. Unlike gold Exchange Traded Funds (ETFs) or physical gold holdings, Sovereign Gold Bonds won’t attract long term capital gains tax hereon. You already entitled to earn 2.75% interest on your initial investments.

PersonalFN is of the view that, investing 10%-15% of one’s portfolio in gold is the prudent way. Considering the pros and cons, Sovereign Gold Bonds remain the most attractive avenue to invest in the precious metal.
 

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