The global macroeconomic headwinds have brought the focus yet again on gold. Historically, whenever there has been a weakness in the dollar investors have flocked to gold as a store of value. And quite conversely, the precious yellow metal has been a less favourable choice of investment when the U.S. dollar has strengthened.

At present a fear that the Federal Reserve in the U.S. may increase policy rates, from a near zero interest rate environment, has been looming. The U.S. Federal Reserve Chairperson, Ms Janet Yellen's remarks that interest rates are likely to rise this year has made global markets jittery, but the U.S. dollar has become stronger vis-à-vis other major currencies of the world.
 

In anticipation of rate hike by the Federal Reserve in the U.S., commodities traders have been betting on a fall in gold prices. Traders have been shorting gold looking to make a profit, as price falls.

Would that be a prudent approach to follow for you?
Well, certainly the talks that the Federal Reserve may hike interest rates sometime this year, is keeping some sheen off gold. Although the job data in the U.S. has been encouraging, the Index of Consumer Expectation (which focuses on three areas: how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term); has been moving up and down, and so is wobbliness seen in Business Confidence in the U.S. Inflation too, has not moved along as per the expectation of the Federal Reserve and the International Monetary Fund in a recent statement has cited an uncertain inflation prospects in the U.S.

Hence, the state of the U.S. economy appears to be fragile - and that's one of the reasons why the Federal Reserve has been patient on increasing interest rates. To us at PersonalFN, it appears that the Federal Reserve in the U.S. may push rate hike decision to somewhere towards the tail of 2015, or early 2016. The Federal Reserve may give more time for the economic recovery to look more assuring. The accommodative stance adopted by the Federal Reserve is expected to bode well for gold in the near term.

Investor sentiment towards gold could also turn favourable if the situation in Greece worsens as negotiations seemed to have been on an edge. Greece has failed to chart and implement an effective debt management plan to defray its creditors. The main factor blocking a deal is difference between its European and IMF creditors over debt restructuring. Greece's finance minister, Mr Yanis Varoufakis has stated that exiting the euro zone is not a viable option and that Greece will do whatever it can to pay its debts. Greece had bundled four payments due in June into a single € 1.6 billion (or U.S. $1.8bn) lump sum, which will now be due on June 30. If Greece fails to fulfil its debt obligations and defaults, gold prices could move northwards.

Gold in India…
Gold in Indian rupee terms lost some sheen and has displayed volatility. A weak rupee may temper the impact of any descending move in international gold prices.

The erratic and unseasonal rainfall has already weighed on the demand for gold in India. Going forward, if the southwest monsoon turns out to be deficient or even below normal as forecasted by the Indian Meteorological Department (IMD), it could have bearing on gold. Another factor that will have a bearing on gold demand is the wedding season in later half of the year. A 40% drop in the number of wedding muhurats as per the Hindu calendar in the second-half of 2015 may hit gold jewellery sales this year. But the onset of festive season since July onwards would come to rescue and lift demand for gold.

The Government's move of making it mandatory for buyers to provide their Permanent Account Number (PAN) while buying gold over a value of Rs 1 lakh, also abated demand for gold.

The strategy to follow…
PersonalFN is of the view that, taking a view of the global headwinds which are evident it is important that you be a smart investor and allocate some portion of your investible surplus in gold. 10% - 15% of your total portfolio should be held in gold (via gold ETFs) with a long term investment horizon. This will help you to diversify your portfolio, which can help you reduce risk to your overall portfolio. As a smart investor you need to view gold as a monetary asset rather than mere commodity as it carries a store of value in times of uncertainties.

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