Here's How You Should Be Buying Gold This Dussehra
Oct 10, 2016

Author: PersonalFN Content & Research Team

After rallying for the most part of 2016, lately gold prices are going through the doldrums. They touched a high of Rs 31, 728 for every 10 grams on July 07, 2016; but fell 6.4% from those levels by October 07, 2016. A combination of international factors and a few domestic factors such as Shraddh (A period when buying gold is considered inauspicious) pushed the gold prices lower.

Gold to get bolder?

Data as on October 07, 2016
Source: ACE MF, PersonalFN Research)

In the international market, the strength of US$ decides the prospects of gold. At the moment, there is consensus on the Federal Reserve (Fed) being likely to hike rates in the U.S. sooner rather than later. This is further supported by the improving conditions in the U.S. job market. The unemployment rate has dropped to a 43-year low in the last week. Rising interest rates push the US$ higher and discourage the gold prices.

But as Indians flock their way to jewellery shops, in search of good fortunes, this Dussehra and Diwali, demand for gold is likely to perk up. Festive season followed by the wedding season may drive the demand even higher. Many large participants in the gold market believe that the falling gold prices may provide an impetus to aggressive buying. This optimism is endorsed by the World Gold Council as well. It recently stated that "a shift in monetary policy need not signal lower gold prices. The price dip will likely result in physical demand from consumers, long term investors and central banks." Adding to this, it said, "the broader market environment of ongoing low and negative interest rates, coupled with continuing political, economic, and policy uncertainty remains unchanged, and are generally positive for gold."

Should you buy gold now?
Those who bought gold last Dussehra are sitting on 10.4% gains—higher than what was offered by most banks on fixed deposits. They might be enticed to buy more, hoping history repeats itself. Although, there is nothing wrong with buying gold on an auspicious day, especially jewellery, whether it would translate into a good investment will depend solely on how much you buy and how long you expect to hold onto it. Those buying with a short term view hoping to make 8%-10% returns in a month or two, as many experts believe that prices are likely to rebound, may be unhappy to see the performance of their investments. On the contrary, those buying with a long-term view of say 7-10 years, may not feel the heat.

PersonalFN is of the view that instead of looking at the strengths and weaknesses of gold, or any other asset class for that matter, you should focus on strengths and weaknesses of your personal balance sheet. You should invest as per your personalised asset allocation which considers your long-term goals and risk appetite.

Therefore, as and when prices drop, you should start accumulating gold at regular intervals and shouldn't just buy on auspicious days. Ideally, gold should constitute close to 10%-15% of your investment portfolio. Speculation in any form is hazardous to your success in investing.

Since the gold has corrected more than 6% from the high it made in July 2016, you may consider adding the precious yellow metal this festive season provided your overall exposure hasn't touched 15% yet. Furthermore, buying gold in paper form is more beneficial as it's safe as well as cost-effective.

If you are planning to buy gold in a paper form, gold Exchange Traded Funds (ETFs), and Sovereign Gold Bonds are the most suitable options. They offer you a good proxy for gold prices. Only that the gold bonds offer you two additional benefits. First, gains from the levy of capital gains tax are exempt, provided you hold them until maturity and second, they pay you an interest of 2.75% p.a.