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Has China Crisis made Gold Attractive for Indians? - Outside View by PersonalFN
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Has China Crisis made Gold Attractive for Indians?
Aug 27, 2015

Gold is a much talked about asset class due to the various benefits that it offers. People prefer gold as it is a store of value. Indians are in fact one of the largest consumers of gold in the world. This year, many investors who had invested in the yellow metal were worried due to the falling gold prices. However, they might have a reason to smile as the picture seems to be changing now. 

As you know, whenever the world economy is struck with crisis; gold becomes more precious. At present, Chinese economy is besieged by all sorts of problems which have sustained for considerable time now. Despite of Chinese Government making efforts to fix them, factors that troubled Asia’s largest economy, seem to have hung on.

As a desperate measure, China recently devalued its currency (Yuan). As a result, U.S. dollar got stronger against a basket of currencies. There is a likely chance that, USD may gain more than gold in the international market if China keeps devaluating Yuan. But this is not the case for gold buyers in India. We are at crossroads where risk-assets such as equities and commodities might be entering a bear phase giving way to USD.

It works out this way

Weak Yuan = Strong U.S. dollar

Strong U.S. dollar = Weak gold (as there is inverse relation between gold and USD)

Strong dollar = Weak emerging market currencies (including INR)

In simple words it means; although gold may or may not rise in dollar terms, rupee denominated gold may gain until rupee keeps depreciating against dollar. This is primarily because; India is a net importer of gold.

Which way would gold pave its path?
Source: ACE MF, PersonalFN Research
Here are the factors that make gold more attractive to Indians
  • Considering the gravity of problems in China, there is a possibility that, China may go in for further devaluation of Yuan. Aggressive interference of China in currency market; may make USD even stronger. If China poses serious threat to other exporting nations (by devaluating its currency) such as Japan or a few nations in the Eurozone; we may see more financial stimulus being announced by authorities in respective regions. As currencies are closely linked, every time trouble spikes in the currency market; USD may go from strength to strength. It is noteworthy that, on Real Effective Exchange Rate (REER); INR was overvalued until recently.

  • What may further support gold, internationally as well as in India is inaction of Federal Reserve (Fed). To protect exporters in the U.S.; Fed may keep policy rates lower for longer than expected or increases may be paltry. As RBI is commitment to lowering the volatility in Rupee; it may not allow sudden depreciation or appreciation against USD.

  • If inflation keeps coming down in India; there could be higher demand for gold from rural markets; besides, sessional demand that arises during festival time.
Should you invest in gold now?

PersonalFN is of the view that if the rupee faces further devaluation, the price of importing gold would increase. Gold has been falling for more than three years now and the bearish sentiment in gold is starting to fizzle out. Investors are once again turning towards gold as a store of value amid a brewing global crisis.  However, speculation should always be avoided while investing. PersonalFN recommends investors to hold 10%-15% of their portfolio 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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