Gold is considered a safe haven traditionally. However, in recent times gold has lost sheen. Looking at its movement in 2014, one may start doubting its outlook. While equity markets in India have given in excess of 20% returns since the beginning of the year 2014, gold has lost nearly 8% in rupee terms over the same time frame. In the international markets too, gold continues to remain weak. It is noteworthy that gold started losing appeal in international markets, from 2013 onwards. But for India, weaker rupee, turbulence in equities, policy paralysis of erstwhile UPA II Government, and levy of high import duty on gold along with other import restrictions; kept gold prices somewhat firm in India.

But now that current account deficit has fallen substantially, and RBI has already relaxed a few of restrictions it had imposed earlier; it is predicted that investment demand for gold might come off even further. If we go by the prediction of India Bullion and Jewellers Association Ltd. (IBJA), gold may touch Rs 23,000 - Rs 24,000 per 10 grams by October 2014. And if that is to be true, many of you might be wondering whether this is a right time to buy gold or you should wait for the yellow metal to fall more.

PersonalFN believes investment demand for gold is falling mainly on account of:
 

• Stable Rupee;
• Fall in Current Account Deficit (CAD);
• A period of 'risk-on' of Indian equities with investors exuding confidence in the new NDA Government and hoping a better tomorrow;
• Continuation of tapering in monetary stimulus package in the United States; and
• Anticipation of rollback in the elevated import duty on gold in India
   

It is noteworthy that the Federal Reserve in the United States has reduced the quantum of stimulus by another U.S. $10 billion a month which now stands at U.S. $45 billion a month. Monetary policy stance in the United States shares negative correlation with gold prices. That is, loose monetary policy in the U.S. is a positive for gold prices and vice versa. But the good news is that the European Central Bank (ECB) has recently cut interest rates to record low. The ECB lowered the deposit rate to -0.1% as a measure intended to pump money into sluggish Euro zone growth economy to revive economy and pull inflation up; which in turn would be supportive for gold. You see, generally loose monetary policy is generally positive for gold. But in a scenario where U.S. dollar firms up again against basket of other major currencies of the globe, gold prices may not show a quick recovery.

As far as Indian equities are concerned, with the emphatic victory of the BJP led NDA in the 16th Lok Sabha elections, there are hopes from new NDA Government; and more so with Mr Narendra Modi looked upon as the catalyst for change, better governance and inclusive economic growth. Thus for Indian equities it is been a period of 'risk-on' and exuberance. We are once again witnessing participation of retail investors at the market top, just as what we saw prior to the emergence of the sub-prime mortgage crisis in the U.S. The Foreign Institutional Investors (FIIs) too are aiding the Indian equity markets to scale up with their roaring participation.

But are the fundamentals backing the up-move of Indian equities?
Well, CAD has has narrowed to to U.S. $32.40 billion (or 1.7% of GDP) in fiscal year 2013-14 from U.S. $87.80 billion (or 4.7% of GDP) in the previous fiscal year. Likewise, fiscal deficit has come is lower at 4.5% of GDP as against the budget estimate of 4.8% and revised estimate of 4.6%. So, the market is finding solace in CAD and fiscal deficit data, although economic growth continues to languish and inflationary pressures yet remain.

The recently enunciated agenda of the new NDA Government, with the following focal points are also aiding the ascending move of the Indian equity market.
 

• Reviving growth;
• Curbing unacceptably high inflation;
• Reigniting investment cycle (which will restore confidence of domestic and foreign investors);
• Accelerating job creation;
• Rationalisation of and simplification of tax regime (to make it non-adversarial and conducive to investment, enterprise and growth)
• Providing a boost to infrastructure (through reinvention of PPP)
• Creating a policy environment which is predictable, transparent and fair
   

The Finance Minister (FM) Mr Arun Jaitley too has listed down growth, inflation and fiscal consolidation as the key triumvirates. So, there is there are hopes of a better tomorrow.

But staying on course in the path of fiscal consolidation wouldn't be an easy task. You see, the BJP's affinity with the corporates may lead them to dole out sops which could encourage economic growth, but it poses a possible conflict in the path of fiscal consolidation. Likewise, given a possibility that FM may even raise the basic exemption limit and provide tax incentives to the aam aadmi who gave them a decisive mandate; challenges in the path of fiscal consolidation remain. Likewise, while the Government may want to spend more on building better infrastructure and reinvigorating growth, again fiscal deficit may come under pressure. Also, amid the official forecast of a below-normal monsoon this year (due to 60-70% chances of an El-Nino phenomenon) - which has danger of doing harm to agriculture produce - the RBI may keep policy rates elevated. In fact if inflation ascends further, the RBI may not shy away from hiking policy rates; this in turn could upset growth.

So while there's a decisive mandate given by the electorates and the NDA has laid out a road map, it will be challenge to deliver and live up to the expectations holistically and realistically.

Will the demand for gold pick up soon?

Investment demand for gold has fallen internationally. Even in India, in the on-going period of 'risk-on' has failed to pick up physical demand for gold. The revival of Indian equity market has changed investor sentiments have set in a mood of exuberance. The rallies in mid and small cap space have attracted many to take very high risk and take less refuge under gold, which in turn has hurt gold demand.

So, should you reduce gold in your portfolio?

Following bearish sentiment in gold, you might feel that you should reduce weightage of gold in your portfolio. PersonalFN is of the view that, although gold is losing ground, its function as a portfolio diversifier is still in place. It still retains its status of a safe haven.

PersonalFN has always believed that, speculating on gold prices may work against you. Unexpected global events might change the outlook of gold quickly and gold prices may not fall as much as they are expected. Geopolitical events have a greater impact on the movement of gold. For instance, while Fed in the U.S. is reducing quantum of stimulus, European Central Bank (ECB) has loosen up its monetary policy further. This arrested, to an extent, fall in gold prices. PersonalFN believes investors should allocated 10%-15% of their investment portfolio in gold consider the investment time horizon. Also perceive gold as a monetary asset rather than mere commodity as it carries a store of value in times of uncertainties. You see, gold is not an instrument to make quick money but a solid long term asset that offers store of value. Hence you should ideally invest in gold with a longer investment horizon.

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