Many of you must have planned to buy gold on the auspicious day of Akshaya Tritiya this year. There is a belief that, investment in gold made on this day, not only remains imperishable but also brings you success and good fortune. Gold has always been important to Indians.

As far as investing in gold is concerned, globally, gold is considered as a hedge against inflation. It is often called a store of value. Gold as an asset class rarely moves in sync with other asset classes such as equity, real estate and fixed income. Therefore, undoubtedly, gold is a "must have" asset and everybody should possess atleast some gold. PersonalFN believes you should hold about 10% to 15% of your investment portfolio in gold.

However, those who bought gold on the day of Akshaya Tritiya over last few years might be sitting on losses for now, due to sluggish gold price movement. On the other hand, equity as an asset class has generated tremendous returns for investors in last 1 ½ years. For a number of reasons including this, many investors might have avoided investing in gold in the recent past. So now, it remains to be seen whether demand for gold revives this Akashaya Tritiya.
 

Does Gold Look Depressed?

Data as on March 31, 2015
(Source: ACE MF, PersonalFN Research)  

First of all you need to know factors that affect gold prices in India
 

• Internationally, when the U.S. dollar (USD) is rising, gold falls and opposite is also true. Therefore, in India, strength of Indian Rupee (INR) against USD primarily decides the price movement of gold. Weaker rupee means higher gold prices
   
• International events and geo-political conditions affect the gold prices globally, and India is no exception to this
   
• Besides, factors given above, policies of Indian Government also affect the gold prices in India. For example, since India imports most of the gold it consumes, hike in import duty gives rise to fall in official demand for gold. Lower demand translates into lower prices
   

Why gold prices are down at present?

Gold prices started rising post global financial crisis in 2008. Federal Reserve (Fed) in the U.S. launched massive Quantitative Easing (QE) programmes, (a form of monetary stimulus) in an attempt of reviving sagging economic growth. Interest rates dropped sharply as Fed followed ultra-loose monetary policy stance. QEs led to the debasement of USD that propelled gold prices as real interest rates fell to near zero levels.

Fed has already wound down QE packages and now there are speculations that it might hike interest rates sooner rather than later. As a result, dollar has been rising against some of major currencies of the globe and gold prices have witnessed an unprecedented fall. Gold prices in India are not impacted as significantly as they are in the international market for the reasons that include,
 

• Following acute fall in the value of INR against USD back in 2013; Indian Government imposed heavy duty on imports of gold in India.
   
• Fall in INR against USD kept gold prices relatively unaffected
   

Where are Gold Prices headed?

Reserves of foreign exchange in India are at all-time high at present. In the 1st bi-monthly monetary policy for the Financial Year (FY) 2015-16; RBI expressed its confidence in India's ability to face the situation that might arise if Fed hikes interest rates in the U.S. RBI has been continuously buying dollars to create a buffer to be able to handle sudden and huge outflows of foreign capital, which are likely, once Fed hikes interest rates. This provided some stability to INR. Stable INR and Stable outlook on INR might be a negative for gold prices in India.

Speaking about, geopolitical tensions in the middle-east, gold prices witness a pull-back when some negative news comes forth; but it has been observed that, rallies in gold weaken when tensions ease; even tough temporarily.

Would demand for gold revive?

Contrary to expectations of gold jewellers, Indian Government has preferred to keep import duty unchanged. High import duty leads to high smuggling of gold but keeps official demand low. If the Government decides to cut import duty, going forward, it might have a positive impact on gold demand, and gold prices may move up eventually. It has been observed that, when gold prices go up, that creates a positive sentiment among people and they buy gold in anticipation that prices will go up further.

Having said this some of the recent proposals are likely to affect gold demand negatively. The union budget 2015-16 made Permanent Account Number (PAN) mandatory for any purchase or sale exceeding the value of Rupees 1 lakh. This proposal has not gone down well with jewellers. According to them about 80% of the USD 122 billion dollar industry comes from rural customers and therefore they fear massive losses. Most rural households and farmers do not possess PAN cards.

Geo-political situation and political stability across the globe are the vital factors that may affect gold prices and the gold demand going forward. Any uncertainty on these fronts would lead to higher demand for gold.

Should you buy gold this Akashaya Tritiya?

PersonalFN is of the view that, rather than speculating on the gold prices; you should keep accumulating gold at regular intervals. Please remember, you shouldn't panic even if gold prices go down after you bought it. You shouldn't invest in gold for maximising portfolio returns but to provide meaningful diversification to your portfolio. Gold ETF remains one of the best options for economically investing in gold.

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