Despite net outflows of Rs 412 crore from gold exchange traded funds (ETF) in financial year ended March 31, 2019, experts expect demand for gold to take off.
Today is Akshaya Tritiya – that time of the year for many of us to buy gold. It’s believed to be an auspicious day to start new ventures as well. And because Akshaya Tritiya comes in the middle of the wedding season that is upon us already, most of us have our trips planned to local jewelers.
But buying gold costs money and its prices go up and down, just like any other asset. Typically, we always suggest to be a bit cautious in buying gold to ensure you don’t go overboard (we Indians love our gold, do we not?). The good news is, this Akshasya Tritiya might just be a good occasion to buy gold. Moneycontrol has been saying for some time already.
Gold prices may move upwards in the next couple of years as the macro- economic picture changes globally. If you have been tracking US President Donald Trump’s tweets for the last couple of years, you would have noticed by now that the world trade and international relations are changing. The tariff wars and increasing protectionism may slow down the global growth.
Geo-political tensions are also on the rise and crude oil is on the boil on account of systematic cut in supply. Brent Crude prices rose 26% since January 1, 2019. Rising crude oil prices are inflationary in nature, especially in consumer markets such as India. That pulls down the growth expectations and investors may move money away from equity to debt.
Though the outlook for gold prices looks good, a 5% fall in March 2019 caused by international developments such as pause in interest rate hike cycle by US Federal Reserve has made gold attractive for Indian investors.
Somasundram PR, managing director India for World Gold Council says, “Soft gold prices and expectation of good monsoon rains should lead to more demand for gold in India this year than previous year.” He expects gold demand to touch 850 tonnes in 2019 as compared to 760 tonnes previous year.
As the tariff wars accentuate and global growth slows down, which is a more likely scenario, the gold prices are expected to remain firm even from an investment demand point of view. As global markets turn volatile, investors are expected to come back to yellow metal in search of safe haven.
Navneet Damani, VP-Commodity Research, Motilal Oswal Financial Services says, “Slower global growth; rising uncertainty and central bank buying will continue to extend gains for gold. Investment demand is also picking up that would broadly elevate buying in the funds and exchange traded funds (ETF).”
He expects stronger gold prices ahead. “For the year, we expect gold to trade with a positive bias with immediate resistance close to Rs 32,500 and a break above this level could take it higher towards Rs 35,000 level and eventually in the next couple of years we expect it to head towards Rs 40,000. One can start investing at current levels and look to average on the downside till Rs 30,600 level is held on.”
In other words, Damani says that gold price will keep oscillating in a range for some time now, before it goes up.
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Does that mean you should go out and buy as much gold as possible? Not really. Gold has been on a sideways move for past five years in rupee terms, keep aside some quick moves that remain short-lived. Gold ETFs as a category returned only 0.25% over past five years.
Naturally, in India we saw investors turning shy of investments in gold. According to Association of Mutual Funds in India – an industry standards organisation of mutual fund business, in financial year ended March 31, 2019, gold ETF saw net outflows of Rs 412 crore.
Gold prices remained subdued because US economy remained on the path of economic growth and US stocks kept on making new highs over past decade. The rub-off effect was seen worldwide and as a result the safe haven demand for gold deteriorated. But gold prices rally primarily in turbulent times, experts say.
Should you invest in gold this Akshaya Tritriya?
For gold, as an asset, to do well, you need to get your entry and exits right. Just like any other asset class. A safer way, therefore, to benefit from your investments is to follow an asset allocation approach. Ascertain how much risk you are comfortable in taking and then allocate in equity, debt and gold.
“Investments in gold should be restricted to 5% to 10% of the overall portfolio,” says Kiran Telang, co-founder and director of Dhanayush Capital Advisors. She advises taking this exposure to gold through gold ETF, gold funds and sovereign gold bonds.
“Buying gold jewellery for consumption is a personal choice. However, it makes a bad investment because of purity issues, making charges and storage issues,” Telang adds.
Gold ETF, gold funds investing in gold ETF and sovereign gold bonds (SGB) passively track the prices of gold. You need a demat account to invest in gold ETF.
SGB are issued by Reserve Bank of India on behalf of the government from time-to-time. SGB though has a tenure of eight years, there is a lock-in of five years. However, if you hold them in demat form, then they can be traded on the stock exchange.
SGB also pays interest at the rate of 2.5% per year. SGB suffer a lot because of low liquidity on the exchange and one buying into them should be prepared to hold on to them till maturity.
If you are considering exposure to gold as a part of long-term asset allocation, SGB are the best option.