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Is Range - Bound Movement in Gold Testing Your Patience? - Outside View by PersonalFN

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Is Range - Bound Movement in Gold Testing Your Patience?
Apr 24, 2015

Have you ever heard about Jewellery shops being kept open for customers till late midnight, just like your nearest medical shop or eating joints that run overnight? Yes, this year on the occasion of Akshaya Tritiya, many gold jewellers in Chennai kept their shops open until late night. There was a mad rush to buy precious yellow metal - gold on the auspicious day of Akshaya Tritiya. However, it was found that, demand for jewellery was higher than that for gold coins and bars. Softer gold prices and bearish sentiment about the future trend has been driving down the investment demand but pushing up demand for Jewellery. In 2014, India with its gold consumption of 842 tonne, replaced China as the world's largest consumer of gold. Prices of gold have been range bound with downward bias for over a year now. The question is will investment demand for gold revive?

Where are gold prices headed?

Gold is an asset class that shines when there is uncertainty about global economic growth. Investors chase gold during crisis or when any part of the globe is vulnerable to widespread turmoil. So will gold shine? PersonalFN believes that, there are likely chances that, gold may remain range bound even going forward. At present, there are no immediate triggers either for a big upward movement or even the downward movement.

But here are some factors that may provide positive cues to gold prices

Geo-political vulnerability: Tensions among Middle East nations and worsened relationships of many nations in the Middle East Asia with the developed nations in the western world may be watched out for. Gold might spike up if any bad news comes from this region or from elsewhere in the world.

Fragile global recovery: Until recently it was believed that world's largest economy, The U.S., is set to recover rapidly. But job data released for March has exposed the fragility. As reported by the labour department, only 1,26,000 non-farm jobs were created in March, fewer than 2,00,000 plus reported consistently every month for a last few quarters. This has significantly reduced the chances of Federal Reserve (Fed) hiking policy rates briskly. The Fed will now have to assess whether the fall in the job creation experienced in March is temporary or foretells weakness in the job market. If Fed delays the rate hikes or goes slow on rate hikes, gold prices may react positively. As USD has inverse relationship with gold, any weakness in the dollar would make gold stronger.

Rising demand for gold from central banks: When put together, global central banks bought more than 477 tonnes of gold in 2014. This has been the second highest figure of gold purchased by central banks in last 50 years. Stranded Russia which has witnessed a massive fall in the value of its currency has been acquiring gold consistently. Now Russia is a country with the fifth largest gold reserves. Kazakhstan has also increased its gold reserves in 2014.

As estimated by the World Gold Council, central bank may buy atleast 400 tonnes of gold in 2015. After selling gold for consecutive 2 decades prior to 2009, central banks are keen on buying gold of late in an attempt of diversifying nation's reserves. The London based gold council also feels that, there is a tremendous scope for many emerging market central banks to increase gold holdings. Continuation of this trend may favour a sustained rally in gold.

Some Negative cues...

Rate hikes by Fed: Although it is less likely, if Fed increases the policy rates sooner than expected, U.S. Dollar may gain further pushing the gold prices down. Considering substantial fall in gold prices over last 1 years; it appears that milder rate hikes are already factored in. However an unexpected portion of the rate hike may drag down gold prices significantly.

Rally in other risky assets such as equity: Investors have been betting on the global recovery and thus investing in risky assets such as equities. Equity markets in various countries have generated tremendous returns in the recent times. If rally in risky assets continues and global economy recovers as expected; gold may fall further.

India specific factors

Government may not lower duty on gold: It has been long anticipated that Government may lower import duty on gold. The high import duty on gold has been affecting the official demand in India. But Government seems to have decided to check outflows of foreign currency on account of gold imports. Lower imports save forex reserves. Unless import duty is cut; demand for gold many not rise beyond an extent.

Requirement of producing PAN for buying gold over Rs 1 lakh: In India the no of PAN cards issued is less than 20 crore. Rural India accounts for fewer PAN cards but contributes significantly in the overall demand for gold. Under such circumstances, the gold demand may fall if demand from rural parts falls.

Threat of a below average Monsoon: Indian Meteorological Department (IMD) has forecasted that there is no chance of excess rain this year but there is a 35% probability that rainfall would be below par this season. Poor monsoon negatively affects the gold demand, especially in rural India as farmers usually buy gold in physical form. When their income is affected negatively, demand for physical gold gets affected too.

PersonalFN believes positives and negatives are almost equally weighted at present. As a result, gold prices may not move significantly up or down in the foreseeable future. Having said this, PersonalFN is of the view that, you shouldn't speculate on the direction of any asset. Your investment decision should be based on your personalised asset allocation rather than attractiveness of the asset class. Diversifying your investment portfolio across asset classes having inverse relationship can help optimise portfolio returns, under normal circumstances. PersonalFN believes, you should maintain 10%-15% of your portfolio in gold.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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