The sudden crack in gold prices has created a flutter among gold aficionados. For those who firmly believed that gold only increases in value, a 20% slide has come as a rude shock. Now that this notion has been dispelled, consumers and investors alike are in two minds as to how they should approach the yellow metal. Is this the ideal time to purchase gold jewellery after the prices have softened? Or should one wait and watch? Sanket Dhanorkar asked some experts for their opinion. Here's what they had to say.
R Venkataraman MD, India Infoline
Yes
The recent, sharp decline in gold prices has shaken the market out of its comfort zone. It is a unique situation because the investors who are holding on to their gold positions are unhappy that the prices have gone down, whereas the women who have been wanting to buy jewellery ever since the stark rise in prices, are delighted and celebrating the fall. At the end of the day, gold is a commodity, and all commodity prices go through cycles. Apart from having limited use as jewellery, gold is also perceived as being a store of value from historical times.
From 2000 onwards, gold has had a dream run, with prices rising significantly on a yearly basis. However, people have forgotten that there was a period during the 1990s, when gold prices had declined continuously. The recent collapse of gold prices can be attributed to a combination of factors, including the speculative sell-off and recovery in the US. If the interest rates in the US go up, gold will start competing with the US treasury. After the subprime crisis of 2008, investors across the globe had bought gold as a store of value. As the world economy stabilises and people's faith in the banking sector recovers, gold is likely to lose its sheen.
My recommendation to investors and savers is to start investing in a disciplined manner and spread the gold purchases over a period of time. Reduce the gold allocation in your portfolio as we think the prices will witness a consolidation and stabilise at around $1,200-1,300 because this is the marginal cost of production.
For those interested in buying jewellery, there is no right time to do so. Whenever you can afford it, walk into the nearest jewellery shop, buy and indulge yourself.
Yes
The recent, sharp decline in gold prices has shaken the market out of its comfort zone. It is a unique situation because the investors who are holding on to their gold positions are unhappy that the prices have gone down, whereas the women who have been wanting to buy jewellery ever since the stark rise in prices, are delighted and celebrating the fall. At the end of the day, gold is a commodity, and all commodity prices go through cycles. Apart from having limited use as jewellery, gold is also perceived as being a store of value from historical times.
From 2000 onwards, gold has had a dream run, with prices rising significantly on a yearly basis. However, people have forgotten that there was a period during the 1990s, when gold prices had declined continuously. The recent collapse of gold prices can be attributed to a combination of factors, including the speculative sell-off and recovery in the US. If the interest rates in the US go up, gold will start competing with the US treasury. After the subprime crisis of 2008, investors across the globe had bought gold as a store of value. As the world economy stabilises and people's faith in the banking sector recovers, gold is likely to lose its sheen.
My recommendation to investors and savers is to start investing in a disciplined manner and spread the gold purchases over a period of time. Reduce the gold allocation in your portfolio as we think the prices will witness a consolidation and stabilise at around $1,200-1,300 because this is the marginal cost of production.
For those interested in buying jewellery, there is no right time to do so. Whenever you can afford it, walk into the nearest jewellery shop, buy and indulge yourself.
Raghvendra Nath
MD, Ladderup Wealth Management
Yes
In India, where almost every family has some investment in gold, the reaction to the fall in prices has been shocking. Suddenly, people have realised that gold prices don't follow a one-way-street. The metal has been the favorite investing destination for Indians, so it's not going to lose its sheen so easily. The long-term history of gold clearly shows that it has been able to beat inflation consistently. If this is the case, a short-term price correction should not rattle investors.
The people who buy gold jewellery with the dual objective of usage and investment should not be worried at all. The logic is simple. If gold prices were to go up to 50,000, would they sell their family jewels? Probably not. Then why should they be worried when the prices have fallen a bit after a heady rally of several years?
So, if you had postponed purchasing gold jewellery because of high prices, technically, it is now available at a discount. Considering the fact that the discount could become sharper in the days to come, you could consider spreading your purchases, if possible.
If, however, you are a financial investor looking to profit from gold in the short term, say, 3-4 years, it is a completely different story. Any investment for the short term has to be weighed against other investments with comparable risk and return. So, one should consider the potential appreciation in gold versus other asset classes like fixed income.
Considering that in four years a fixed deposit would grow by almost 40%, we have to evaluate whether gold will be able to beat it sufficiently or not. The probability of this is quite low as gold has already rallied for more than a decade, with the past three years being the most aggressive. Therefore, the expectation of the rally continuing at the same pace would be quite optimistic. Most of us would agree that gold had become an overpriced asset and the recent correction has made the price a little more reasonable.
MD, Ladderup Wealth Management
Yes
In India, where almost every family has some investment in gold, the reaction to the fall in prices has been shocking. Suddenly, people have realised that gold prices don't follow a one-way-street. The metal has been the favorite investing destination for Indians, so it's not going to lose its sheen so easily. The long-term history of gold clearly shows that it has been able to beat inflation consistently. If this is the case, a short-term price correction should not rattle investors.
The people who buy gold jewellery with the dual objective of usage and investment should not be worried at all. The logic is simple. If gold prices were to go up to 50,000, would they sell their family jewels? Probably not. Then why should they be worried when the prices have fallen a bit after a heady rally of several years?
So, if you had postponed purchasing gold jewellery because of high prices, technically, it is now available at a discount. Considering the fact that the discount could become sharper in the days to come, you could consider spreading your purchases, if possible.
If, however, you are a financial investor looking to profit from gold in the short term, say, 3-4 years, it is a completely different story. Any investment for the short term has to be weighed against other investments with comparable risk and return. So, one should consider the potential appreciation in gold versus other asset classes like fixed income.
Considering that in four years a fixed deposit would grow by almost 40%, we have to evaluate whether gold will be able to beat it sufficiently or not. The probability of this is quite low as gold has already rallied for more than a decade, with the past three years being the most aggressive. Therefore, the expectation of the rally continuing at the same pace would be quite optimistic. Most of us would agree that gold had become an overpriced asset and the recent correction has made the price a little more reasonable.
Kishore Narne
Head, Commodity & Currency, Motilal Oswal Commodities
Maybe..
The answer to this question will vary depending on who asks it. It could be a 'yes' or 'no' according to the person's need and purpose. If one has been postponing the purchase of jewellery, but needs to buy it over the next three months or so, this could be a welcome dip. Even so, one should wait for a few more days so that the high premiums quoted by jewellers cool off and they get the right price for their purchase. If, however, the purpose of buying a gold coin or bar is for investment, then the answer is 'no'. Though we have been anticipating a correction in gold price, the intensity was a surprise. The sheer quantum of the fall warrants a pullback in days to come, but won't justify buying gold as an investment.
The factors that had prompted the rally in the past five years have started to fade. The global economy is turning the corner and the US is showing signs of recovery. Though Europe is yet to come out of the woods, most of the issues will be addressed by politicians who can't afford to let the Euro area collapse. In the process, gold may come to their rescue. As the economies improve, the monetary policies in the western world could tighten, and the biggest threat to gold is rising interest rates in the US, which can happen much earlier than the Fed has predicted.
For Indians, the rupee will play a crucial role in the coming months. With the recent price correction in crude oil and gold, the rupee should benefit as the current account deficit will improve over the next few months. We expect the rupee to appreciate by more than 10% by the end of this fiscal year, which could increase the pressure on domestic gold prices.
In this background, we expect gold prices to correct, and though they may get supports close to the 22,000-24,000 levels, we don't see any significant rally in gold till next year, which makes it unattractive compared with other investment avenues. One can start accumulating gold close to the above-mentioned levels, but keep in mind that the golden era has ended for at least a couple of years.
Head, Commodity & Currency, Motilal Oswal Commodities
Maybe..
The answer to this question will vary depending on who asks it. It could be a 'yes' or 'no' according to the person's need and purpose. If one has been postponing the purchase of jewellery, but needs to buy it over the next three months or so, this could be a welcome dip. Even so, one should wait for a few more days so that the high premiums quoted by jewellers cool off and they get the right price for their purchase. If, however, the purpose of buying a gold coin or bar is for investment, then the answer is 'no'. Though we have been anticipating a correction in gold price, the intensity was a surprise. The sheer quantum of the fall warrants a pullback in days to come, but won't justify buying gold as an investment.
The factors that had prompted the rally in the past five years have started to fade. The global economy is turning the corner and the US is showing signs of recovery. Though Europe is yet to come out of the woods, most of the issues will be addressed by politicians who can't afford to let the Euro area collapse. In the process, gold may come to their rescue. As the economies improve, the monetary policies in the western world could tighten, and the biggest threat to gold is rising interest rates in the US, which can happen much earlier than the Fed has predicted.
For Indians, the rupee will play a crucial role in the coming months. With the recent price correction in crude oil and gold, the rupee should benefit as the current account deficit will improve over the next few months. We expect the rupee to appreciate by more than 10% by the end of this fiscal year, which could increase the pressure on domestic gold prices.
In this background, we expect gold prices to correct, and though they may get supports close to the 22,000-24,000 levels, we don't see any significant rally in gold till next year, which makes it unattractive compared with other investment avenues. One can start accumulating gold close to the above-mentioned levels, but keep in mind that the golden era has ended for at least a couple of years.
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