Friday, April 26, 2013

Should you invest in gold now?

I know this is late by two weeks –I was travelling for book sessions to Pune and Delhi for the past two weeks and hence I could not blog. In all my book sessions, this topic came up – should we invest in gold or not?

So here is my take –

If you follow my blogs or have read the chapters in my book on Gold– you would know that:

Indian price of gold = “Global price of gold” X “USD / INR conversion ratio”.

The current drop of gold price is directly attributable to the global price of gold.
Around the 15th of April, gold price dropped by about 10% - from around $ 1550 -1600 per ounce to around $1350 per ounce. It is now around $1450 per ounce.
This had a corresponding fall in Indian markets - from Rs 2725 per gm to Rs 2400 per gm – now it is around 2475 per gm.

The global price of gold was expected to be subdued in 2013 as the US stock market has risen since 2012 – globally, money is moving away from gold and moving into equities. Also, gold has gone up in USD terms for 12 straight years and so a small correction in the price was expected sometime soon.

In the coming two years, the US stock markets are further expected to do well – that single factor will keep global gold prices subdued in 2013 and 2014

Will it be in the current range of $ 1450 per ounce?  
Most analysts believe that this would be the case. I too believe that global price of gold will not go up in the coming 2 years.
The second factor -the USD/INR ratio will surely help Indian gold investors a bit as the long term trend of the USD /INR ratio is one of devaluation.  I believe that INR will devalue by about 6% to around Rs 57 to a USD  this year and that will give the gold investors in India a 6% appreciation in gold prices. I expect similar scenario next year even though it is hard to predict next year as it is an election year.

When you combine these two factors, with a 2 year time frame – you can see that, gold in India will not give great returns – it would be close to 6-10% returns per annum at best.

So should you invest in gold?

Surely not with a two year perspective. 

Those who bought gold in the current dip - well you will make a few % points more as your entry price was low – but that is not a good enough reason to buy gold with a two year horizon.
Those who hold gold in their portfolio - be aware that you will get only 6-10% returns on this part of your portfolio and then decide whether you want to keep it or sell it.