The economic turmoil prevailing in the global economy – especially the Euro zone, has caught the attention of many towards the precious yellow metal. Thus one may have witnessed that in the last few years, gold has galloped leaps and bounds. Situation of debt-overhang in the Euro zone, fiscal cliff confronted by the U.S. and a rippling and crippling effect of all of such economic events on the domestic economy, has made smart investors take refuge under the precious yellow metal and thus the demand too has elevated. It is noteworthy that in the fiscal year 2011-12, India's gold imports stood at U.S. $60 billion and the quantum of import was 1,067 tonnes. But now this significant rise in import of gold is leading to India's Current Account Deficit widen, and that is what is worrying the Reserve Bank of India (RBI).

In the 2nd quarter review of Monetary Policy 2012-13, RBI proposed to advise banks that other than working capital finance, they (banks) are not permitted to finance purchase of gold in any form and a detailed guideline in this regard will be issued separately. Recently, the central bank vide a notification put in effect this proposal and thereby advised banks that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold mutual funds.

The guidelines for bank finance for purchase of gold apply to dealers/traders in gold. If in the assessment of the bank, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion, they can decline advancement to such dealers/traders in gold. However, in case if a jeweller approaches the bank for genuine working capital requirement, banks can provide finance.

We believe that, the notification issued by RBI is a consequence of fuelling demand for gold in the last few years, which has put pressure on India's CAD (due to rise in gold imports). However, we don't view this move to limit the upside movement of the precious yellow metal or abetting to curb the genuine demand arising for gold. This is because with downbeat global economic sentiments prevailing smart investors will continue to take refuge and take more exposure towards gold, due to its trait of being a store of value during uncertain times.

We think that the physical demand during festive season and wedding season is likely to be supportive for the precious yellow metal. Traditionally, the demand for gold in India (world's top consumer of gold) rises in the last quarter of the calendar year, and this cyclicality could push gold prices further northwards. Hence in this context from an investment point of view, GETFs would continue to do well, due to positive impact on gold prices. At PersonalFN, we recommend that you should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.

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