Moneycontrol
Oct 28, 2016 10:48 AM IST IST | Source: Moneycontrol.com

Samvat 2073: Gold may reward investors with fair returns

As an investment tool one can go for buying physical gold. But now-a-days with the innovation in products and to diversify against any future uncertainty, Gold bonds and Gold ETFs are becoming attractive options.

Ravindra Rao
AnandRathi Commodities

Precious metals are more stable and traditional investment tools than stocks and currencies as they would always have an inherent value. The stock markets may plunge with wild swings if economy fails to deliver; economic indicators signal downturn or geo-political instability emerges. Risk averse and savvy investors have always preferred to invest in the gold as investing in stocks, bonds and currencies is more difficult. Often, investing in precious metal is largely co-related with investing in the gold. No doubt, the gold is a valuable commodity; there are other precious metals also such as silver, platinum and palladium.

Of course, in the short period, the returns can be volatile but in the long run, the investment in precious metal has always been bright. One can invest in the gold considering it as diversification option too. Investors in countries such as the US, the Europe and China park their money in the gold as an investment option. But in India, the approach of people is completely different. In most cases, it is attached to the emotional factor of owning the physical gold for variety of purposes.

As an investment tool one can go for buying physical gold. But now-a-days with the innovation in products and to diversify against any future uncertainty, Gold bonds and Gold ETFs are becoming attractive options. Something which is fixed in this market is ‘volatility’ or ‘uncertainty’. If we look at events which are going to hit the international markets in the near future are US presidential elections, Fed monetary policy and BRexit process. During the time of event risks, financial markets experience severe volatility. To hedge against such uncertainty and volatility, it’s obvious to go long in the gold. An outcome of ‘BRexit referendum’ was completely unknown to the world. Fed’s policy decisions significantly affect trends in the gold and silver.

Since last rate hike (December 2015), the Fed has kept interest rate unchanged. US- based money managers continued to buy Gold backed ETFs till July 2016. According to the CME’s FedWatch Tool (dated 25th October) there are 68% chances of hiking a rate in December meet. Still according to few veteran market experts, the Fed is unlikely to raise rates in 2016, and this may push gold prices further up.

India’s affair with Gold/Silver has different aspect. India is the second largest consumer of gold jewellery. Indians bought gold in form of jewellery weighing 654 ton, next to China that stands first with jewellery weighing 784 ton of gold. The reason for Indians buying gold as jewellery is deeply rooted in its culture especially during weddings.

Moreover, a strong monsoon is another trigger to buy the gold. Abundant rains push up demand for gold jewellery among income-flush farmers in rural areas who make up a third of country’s consumption of gold. To add to this, this year around August-September, the MCX prices were trading near Rs. 32,200-32000 but now are trading near Rs. 29,800–30,000 definitely more affordable than two months back. However, in this Deepawali, prices are well above the Rs. 25,000-25,200 witnessed during the last Deepawali. The uptick in price is attributable to international factors.

Surprisingly, the rural demand for the silver has increased as its price has fallen by nearly 8% since October 2016. According to the Bullion Federation of India, the silver imports have come to stand still. But last week good buying of fresh stock was observed and that is encouraging. This may continue if prices do not shoot up sharply during festival season.

India’s gold imports have fallen by approx 59% from January-September to 270 tonnes from 658 tonnes same period a year ago, according to a Reuters report. According to ASSOCHEM, prolonged strike by jewellers, continuation of 10% custom duty and higher prices put demand under pressure. India’s jewellery and investment demand fell sharply due to a price surge in the first half of the year and jewellers’ strike in March and April. Even the ‘Akshaya Tritiya’ witnessed lackluster demand. As the prices soared in international markets, jewellers offered heavy discounts to lure customers. But all measures failed.

The ASSOCHEM report also highlighted that imports are likely to rise due to festival demand & wedding season in October. According market sources, the government is likely to reduce the import duty on gold from 10% to 6% to curb smuggling during the ‘Deepawali’ & wedding season. Now festival season is knocking the doors and we may see revival of fresh demand. Indian demand has potential to revive during the festival time. Hence, there are fair chances of gold prices offering decent returns in the samvat 2073.
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