You have a reason to smile if you are planning to buy gold jewellery this festive season. Gold has been under pressure and has made a 14-month low recently in India. Globally, the yellow metal has lost its sheen. Investors have been shunning gold and investing in stocks and other risky assets. If you too are worried about falling gold prices and planning to reduce your exposure, you might be missing a larger picture. Here's some food for thought which could change your decision.

Easy monetary policy and gold prices
You see, the Federal Reserve in the U.S. (Fed) has been adopting an easy monetary policy since the past 5-6 years. The Fed has pumped trillions of U.S. dollars through stimulus packages in measure to revive the U.S. economy which faced the aftermath of the U.S. sub-prime mortgage crises. Interest rates have been held near zero level for quite a long. And as the economy looked wobbly in the backdrop some weak macroeconomic variables, gold became bold. Even the central banks of the world took refuge under gold during such times. There was a rise in investment demand for gold and by 2011, gold prices skyrocketed.

Now that stimulus programme is in its withdrawal phase and the Fed is expected hike rates sooner or later (amid signs of economic vigour depicted by the U.S. economy), investors across the globe have started shunning away from gold. You see, the U.S. dollar is gaining strength against other major currencies of the world, bond yields in the U.S. are rising...and all these are indications that risk aversion that pushed gold prices up, is fading away. Global investors are taking aggressive bets on developed market stocks and also the emerging markets.
 

But has gold lost its sheen for long?

Data as on September 19, 2014
(Source: ACE MF, PersonalFN Research)  

Where are gold prices headed?
Well, there are both, positive as well as negative cues for gold. For the time being, speculation that Fed may hike interest rates next year remains the single most negative cue for gold. However, weaker job data in the U.S. suggests that, how much the interest rates would actually move up is difficult to predict. Such an indecisive scenario and easy monetary policy adopted by the central banks in the developed economies would be supportive for gold. As you may know, recently the European Central Bank (ECB) cut policy rates keeping in mind a risk of deflation to the Eurozone economy. The growth indicators in Europe have been sagging. ECB has launched a new stimulus package for promoting growth in the region. Following the footsteps of ECB, the People's Bank of China (PBoC) has also planned to inject U.S. $81 billion (about Yuan 500 billion) in 5 largest banks of the nation. Easy money often flows in real assets such as gold. Moreover, geopolitical tensions may also keep the gold prices firm.

Speaking about outlook for gold in India, rupee-dollar movement would play a crucial role. At present, rupee appears a lot stable as India's current account deficit has shrank substantially and foreign exchange reserve position is quite comfortable. While the Q1FY15 GDP growth rate reported an uptick of 5.7% after languishing for long, the buoyancy of such an upbeat data is yet to be seen while the NDA Government is taking steps to reinvigorate growth. But elevated policy rates could be a challenge in this path. The World Bank too has lowered India's growth estimates for 2014 to 5.5% from 6.2% projected in January 2014. The RBI too its 3rd bi-monthly monetary policy statement for 2014-15 has maintained its view on the real GDP growth rate in the range of 5.0% to 6.0% in 2014-15, evenly balancing out with central estimate of 5.5%. The RBI has even warned that if the risk related to global recovery, the monsoon and geo-political tensions intensify; the balance of risks could tilt to the downside.

So should you buy gold now?
PersonalFN is of the view that, it is imperative for you to be a smart investor and take refuge under gold. You must own some portion of your portfolio in gold. The onset of festive season is likely to increase the demand for gold. Stockists and jewellers would also add to their inventory to meet festive demand...and such a scenario could lead to prices ascend. Amid such a time smuggling activity is expected to remain buoyant to meet demand domestic demand and hawala corruption may also be reported.

PersonalFN thinks that, as smart investors you need to view gold as a monetary asset rather than mere commodity as it carries a store of value in times of uncertainties. You can take refuge under the precious yellow metal and add it to your portfolio from diversification point of view (due to the inverse co-relation with other asset classes), thereby reducing the risk to your overall investment portfolio.

PersonalFN believes you should consider your investment time horizon and accordingly allocate 10%-15% of your total portfolio in gold via gold ETFs.

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Comments

alokkothari2014@gmail.com Sep 22, 2014 It is good to add gold to your portfolio now and you have given all positive points for gold. But you have not mentioned the biggest negative point of buying gold in India which is the premium paid in buying gold in India.current premium is approx 13-15% due to duty in India. therefore if tomorrow government decides to drop the duty then investment into Gold ETF in india can loose 15% value. as long as there is duty in india gold investment is not advisable. prices of ETF may fall overnight on removal of duty.

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