Various factors have led to a bear market in commodities, in particular gold and oil, over the last year. Gold prices have fallen more than 40% since their peak at the start of 2011. Since 2012 gold has been in a continuous bear market as investors loose interest in the yellow metal.

Various factors have contributed to the fall in gold prices.

The Federal Reserve in the U.S. may increase interest rates sometime this year, which is keeping some sheen off gold. The signs of economic vigour depicted by the U.S. economy have gone on to strengthen the greenback, leaving gold to be less favourable. The Greek crisis in the Eurozone also seems to have supported the dollar. Investors haven't seemed to be moved by the Greek debt crisis to buy into gold as a safe haven, which is why there wasn't an evident reversal in the corrective for gold. Investors possibly perceived that the contagion led by Greece defaulting on IMF loan and Greeks rejecting the terms of bailout, would be limited to the Eurozone.
 

Data as on July 17, 2015
(Source: ACE MF, PersonalFN Research)  

As the Greeks have now accepted the terms of the bailout package and come to an agreement with its creditors, gold prices are slated to fall further. The downward pressure on gold is mounting as traders are developing short positions due to aforesaid factors. Holdings of the SPDR Gold Trust, the largest gold-backed exchange traded fund, dropped by 11 tonnes to hit 696.25 tonnes - the lowest this year and below levels of August 2008. The US CFTC data shows that the volume of short positions in gold futures crossed 1, 43,000 in the last few weeks.

Demand for gold in India

The sluggish demand for gold in India also attributed to the descending move for the precious yellow metal. It should be noted that around 2/3rd of India's gold demand comes from the rural areas. With the onset of the southwest monsoon, farmers focused on spending on agriculture rather than buying gold. Also the IMD's forecast of sub-normal monsoon made them a little more cautious. Lack of festive and buying season also went on to damp demand for gold in India. Hence gold merchants witnessed a bit of inventory overhang as higher imports of past months and relatively lesser demand translated into higher inventory.

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. But despite the drop in demand, smuggling in gold did persist because the Government in its endeavour to control its Current Account Deficit (CAD) kept the import duty on gold locked in 10%.

What should be your approach?

It is likely that gold prices would fall further from here on. Increased selling pressure due to international events in Greece and the US are to put downward pressure on gold in the near term.

PersonalFN is of the view that, investors should avoid speculative approach and diversify across asset classes. The importance of diversification shouldn't be undermined as it may help you optimise returns for the risk taken.

PersonalFN believes one should view gold as a monetary asset rather than mere commodity as it carries a store of value in times of uncertainties. In times when uncertainty yet prevails amid the period of risk-on, it is important that you allocate some portion of your investible surplus in gold. This may help you hedge your portfolio. PersonalFN suggests you invest 10%-15% of your total portfolio in gold via gold ETF. Remember gold is not an asset to make quick buck, but a solid long term asset that provides you true diversification. Hence, you should ideally invest in gold with a longer investment horizon.

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syedabitheenm@gmail.com Nov 12, 2016 hello Sir, Please write a detailed article on Gold ETF and soverign gold bonds which is best way to invest in gold with the long term perspective ?  Thanks, Syed Abitheen

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