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Why gold prices in India may remain firm? - Outside View by PersonalFN
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Why gold prices in India may remain firm?
Jun 15, 2013

The 'see-saw' movement in the price of gold has left many to wonder, where's the precious yellow metal headed. After witnessing a sharp dip in mid-April 2013, price of gold in India has once again risen (See chart below).

Movement of gold since beginning of 2013
Data as on June 07, 2013
(Source: ACE MF, PersonalFN
Research)

So, what is refraining gold from correcting vehemently, and show an impulse yet again? Well there are host of factors in play. They are:
  • Increase in import duty on gold: In the Government's endeavour to curb widening Current Account Deficit (CAD), many of you may be aware that the import duty on gold has been raised twice thus far this calendar year, placing it at 8% at present. But such a move would increase the landing cost of gold. In fact the World Gold Council (WGC) has also said that curbing gold import may have short-term benefit in containing demand, but cautioned that consumers' appetite for yellow metal will ultimately be fulfilled by the unauthorised grey market.
  • Depreciating Indian rupee: With the Indian rupee having touched a low of 57.07 (as on June 7, 2013) and appearing weak yet; prices of gold in India could remain firm as that also increases the landing cost of gold.

Gold in U.S. dollar terms
Data as on May 31, 2013
(Source: World Gold Council, PersonalFN
Research)

It is noteworthy that gold in U.S. dollar on the other hand, has descended more vis-a-vis gold in India. Well the reason is appreciation in dollar has resulted in precious yellow metal losing sheen. You see, in U.S. dollar terms gold prices have undergone a corrective in the recent past, while gold in Indian rupee terms have once again exhibited sheen (See chart above).

Apart from the aforementioned factors which have resulted in increased landing cost of gold. There are host of other macroeconomic factors too which could influence many to buy gold. Many of you may be aware that since the last two fiscal years, domestic GDP growth has been depicted a descending trend. Likewise the Euro zone has a gloomy picture of its economy to exhibit, as there is contraction in economic growth rate and double-digit unemployment rate there. In the U.S., although there are signs of economic vigour, whether that would sustain and / or even improve remains to be seen, in context to prospect of wind down of monthly $85-billion bond-buying programme by U.S. Federal Reserve.

So in this backdrop, PersonalFN is of the view that smart investors would be encouraged to invest in gold to safeguard against economic uncertainties and gold would be viewed as monetary asset rather than a mere commodity. While the Reserve Bank of India (RBI) has put restriction on banks and nominated agencies to import gold on consignment basis and banks are precluded from providing loan for gold purchases; it may not yield the desired results. Smart investors would take advantage of relatively cheaper price of gold (in comparison to its all-time high), which would boost the physical demand for gold, as many may prefer to invest for both - emotional and financial reasons. It is noteworthy that according to the WGC shipment of gold to India is expected to reach at around 900 tonnes level in calendar year 2013 due to rise in demand following lower prices. Last year (i.e. in calendar year 2012), India imported 860 tonnes of the precious metal, while demand stood at 864 tonnes in the same year.

At PersonalFN, we recommend that you should have a minimum of 10% - 15% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.

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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