Should you start buying Gold or wait for another fall?
Gold prices fell massively in India last week and are expected to go down further. If we go by the prediction of India Bullion and Jewellers Association Ltd. (IBJA), gold may touch Rs 23,000 - Rs 24,000 per 10 grams by October 2014. Almost a dip of around 15%. A few of you might feel why to buy gold right now if prices are expected to go down. It might sound logical. But before you make up your mind to wait until gold touches Rs 24,000 mark, you need to make a fair assessment of situation.
Is Gold Headed Downwards?
Why gold prices fell?
As you might be aware, Indian government had imposed severe restrictions on gold imports to bring down Current Account Deficit (CAD). Deficit is caused when India owes more to other countries than what it is entitled to receive. To improve CAD, Reserve Bank of India had imposed several restrictions on gold imports and barred many entities from importing the yellow metal. It also designed a formula which is popularly known as 20:80 rule. Under this, atleast a fifth of imported gold needs to be exported as a finished product. It is noteworthy that only a few designated banks were allowed to import gold by using this formula. Last week, RBI eased these norms partially. It has now also allowed large private gold importers and premier trading houses to import gold by using the 20:80 formula. As a result, now more entities can import gold. In addition, RBI has allowed nominated banks and nominated agencies to provide gold as loans to jewellers and bullion traders for domestic use. This will enhance the availability of gold in India. Until now, due to scarcity of physical gold, it was quoting at a premium in India. In simple words, this means, even after adjusting for currency movement, gold was expensive in India.
Will gold prices move down?
Data as on May 23, 2014
(Source: ACE MF, LBMA, PersonalFN Research)
Situation on ground has been improving steadily. If the newly elected government gets convinced that there is a room for easing import curbs further, gold prices may come down further. The government and the RBI need to closely track the following key indicators:
These three factors indicate that, Indian rupee is under less pressure as compared to a year back. This gives more scope and space to RBI and Indian government to lift restrictions. Another important factor that may demand some easing of gold import restrictions is gold smuggling. In 2013-14 gold smuggling went up 4 times as gold worth Rs 245 crore was seized. Looking at this you would imagine the actual value of smuggling might have been much higher. Such trend canít continue for long. This also indicates that, there is still a huge demand for gold at lower rates.
- Current Account Deficit (CAD): CAD fell sharply to 0.2% of GDP in the 4th quarter of the fiscal year 2013-14. As against this the CAD was at 3.6% of GDP in the 4th quarter of 2012-13.
- Trend in inflows of foreign capital: the inflow of foreign capital in India has strengthened over the past 6 months.
- Forex reserve position of India: As on May 16, 2014, India's foreign exchange reserves stood at USD 314.9 billion (which has gone up by about 15% since September 2013).
What to expect?
There has been a huge jump in gold smuggling activity. But pressure on current account deficit and the Rupee has gone down substantially. Considering this Indian government and RBI may remove some more restrictions on gold. However, they would be watchful of the trend in gold demand. Also, controlling CAD would remain the top priority even for the new government. Moreover, RBI policies would be well directed at protecting Indian rupee.
Should you hold back?
As and when government starts lifting restrictions one by one, availability of gold will improve. As a reason, gold premium may get erased. In addition, if government slashes import duty, gold prices would fall further. International gold prices would also impact domestic prices. Commencement of roll-back of stimulus package in the U.S. has already made the outlook of gold less attractive. Developments in Ukraine region may also affect gold prices.
PersonalFN is of the view that, irrespective of direction of gold prices, you should add gold to your portfolio whenever you see a steep fall. PersonalFN recommends investors to hold around 10%-15% of their investment portfolio in gold. Gold is not only a portfolio diversifier but also a hedge against inflation. So letís not speculate and wait for gold to come down to 24,000 levels (per 10 grams). Indians have a special bonding after gold. Any price correction in gold may lead to huge demand for the yellow metal and government may start worrying about CAD and Rupee again. In that case some gold import restriction may stay in for long. Be watchful.
This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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