It may be the right time to buy some gold

Abhimanyu SofatAdvisesureGold prices have corrected from the high of around Rs. 35,000 in 2013 to Rs. 26,500 currently. With investor expectation from real estate and FD coming down, there is likely to renewed interest on investing in equities. But a lot of analysts have warned that if US interest rate rise, the equity markets may not do well. There is also a near consensus view that Gold does well only when interest rates fall. Relationship between US interest rate hike, US Gold and India Gold PriceThere have been six instances of US interest rate hikes of over 2%. From the below table, it is quite clear that there is no coherent relation in the long-term between US gold prices and US interest rates.But, there is a positive correlation between FED interest rates and Indian Gold prices of more than 0.8 which is very strong. Whenever, the US has increased rates, Indian Gold prices have increased always till now. The reason for the same has been normally dollar appreciates against the Indian rupee leading to the appreciation in gold price. Relationship between Sensex and US interest rate hikeSince Sensex has been in existence for only 36 years, there have been only three instances of US interest rates been increased by more than 2%. Typically interest rates are increased if the economy is very strong resulting from higher inflation. From 2003 to 2007 though FED had increased rates, there was ample liquidity in the global economy which led to a strong performance from emerging markets like India. As the above table clearly indicate, that over a long term there is no definite one to one correlation between US Fed rates and Sensex return. This has also to do with the fact that except for the last hike, India never had so much dependence on foreign flows.Conclusion:Our analysis suggests that there is no one to one relation in the long-term between Indian equity markets and US FED rate hike. So one should not get worried about outflows from India due to rate hike impacting Indian market. Secondly, we do find a strong positive relationship between the price of gold in India and US interest rates. So in case an investor is looking to diversify from equity to some other asset class, we would recommend him to have some allocation in gold.