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Planning to buy gold this Akshaya Tritiya? Read This - Outside View by PersonalFN
 
 
Planning to buy gold this Akshaya Tritiya? Read This

Customs and traditions are extremely important to Indians. Many people in India believe that if they start with some activity on 'muhurat' then that will fructify. There is a belief that buying gold on the auspicious day of Akshaya Tritiya, brings prosperity to the buyer and his wealth never gets eroded. Gold is a symbol of wealth.

Can Gold generate wealth for you?

PersonalFN did a simple calculation for this. Assume that you invested in gold on the occasion of 'Akshaya Tritiya' every year since 1994. We have seen gold prices multiplying many folds over a period of past 20 years. Moreover, your money would have approximately grown at a compounded annualised rate of 12.3%, as on April 28, 2014. In the past 20 years, there have been just 5 occasions where gold prices were lower as compared to the previous year, on the day of Akshaya Tritiya. Historically, investing in gold on the day of Akshaya Tritiya may seem to be rewarding.

But should you invest in gold only on Akshaya Tritiya?

PersonalFN is of the view that, you should hold 10%-15% of your portfolio in gold. Investing in gold provides you hedge against inflation. Gold acts as a portfolio diversifier. Therefore, instead of buying it only on the auspicious occasion of Akshaya Tritiya, you should buy it regularly. You should maintain a proper allocation to gold.

Will gold become unattractive now since the U.S. has started rolling back stimulus?

In C.Y. 2013, gold recorded its biggest annual loss since 1981 in the international markets. There were speculations that the Federal Reserve (Fed) in the United States may not only roll back stimulus programme but might also go ahead with pre-mature hiking of rates. (Interest rates in the United States and the gold prices in dollar terms move in opposite direction). Such speculations pushed the gold prices down. US Dollar moved up against other currencies. Despite fall in global markets and India importing most of the gold it consumes, high demand for gold has kept gold prices in India somewhat unaffected in the F.Y. 2013-14. For all these reasons, many of you might be wondering if you should buy gold this Akshaya Tritiya.

Movement of gold
Data from April 28, 2009 to April 28, 2014
(Source: ACE MF, PersonalFN Research)

PersonalFN is of the view that, weakness in gold prices might provide you excellent opportunity to accumulate gold from long term perspective. At present, spot gold commands premium of about USD 185 per troy ounce in India. While the price per troy ounce of gold in US is around 1,290 USD, in India it is at around 1,475 USD. The local gold price is commanding premium due to tight supply following import curbs. This means, even after converting gold prices from dollar to rupee, gold is expensive. Therefore, you shouldn't expect prices to come down.

Would gold prices stay up for long?

To improve current account position, government had hiked import duty on gold and imposed restriction on importing gold in India. Unless, current account deficit sustains at lower level, it is unlikely that the government would consider rolling back restrictions on gold. This means, gold prices may stay firm in India. It may not be affected much by the global trend unless rupee falls or rises significantly.

PersonalFN is of the view that, it would be wrong to believe that gold never falls. Rather than speculating on where the gold prices are headed in 2014, you should keep buying gold whenever prices fall. The legendary equity investor, Warren Buffet famously quoted "be fearful when others are greedy and greedy when others are fearful". PersonalFN believes this is true even for those who want to invest in gold. Gold ETF remains one of the best options for economically investing in gold.

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

Disclaimer:
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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