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Gold is believed to be one of the best hedging instruments against uncertainties, and this contributed towards prices of the precious yellow metal peaking in 2020. However, after touching new highs last year primarily because of the pandemic, gold prices have started plummeting ever since.
In fact, prices of gold in India touched an all-time high of Rs 56,191 on MCX in August, but are now crawling upwards after nosediving to around Rs 44,000 earlier this month. As such, it’s understandable that many gold investors and end-users would now be in a dilemma about how to strategize their future course of action. However, before discussing a few options available to the investors, let’s understand the reasons behind the recent slump in gold prices.
Why are gold prices falling now?
The consistent surge of the US dollar against other major currencies is one of the main reasons for the fall in gold prices. The USD and gold prices are inversely correlated. It means, when the value of the USD appreciates, gold prices fall and vice-versa. Another reason to fuel this trend could be attributed to the rise in the US bond yield in the last few months. Investors usually find it more lucrative to park their funds in bonds than gold when the bond yield rises. So, they dump gold and focus on investing in bonds for greater returns.
Should you be concerned as an end-user?
As an end-user, you should not be concerned because you are buying gold to use as jewellery. Fall in gold prices could actually be a piece of good news if you’re planning to purchase ornaments in the near future because it will also reduce the jewellery making charges in absolute terms. Assuming a making charge of 10%, if you had to pay Rs 5600 for 10 grams (10% of Rs 56,000) in August last year, you’ll now have to pay only Rs 4600 going by the current pricing trends. As such, you can save Rs 1000 per 10 grams compared to peak gold prices in August last.
In the long term, gold prices usually outperform the average inflation rate. In the very long term, say after 20 or 30 years, if you want to sell the jewellery you have bought now, its return will not be affected by the volatility in the prevailing situation.
What should gold investors do now?
Domestic investors who have invested in gold for the long term shouldn’t be much worried either about the fall in gold prices. Due to huge stimulus announcements to support the economy and pressure on gold prices, investors have got attracted to other assets, especially equities. The stimulus liquidity won’t last long, and the demand for gold is expected to start picking up once again. The INR has also started depreciating against the US dollar — from Rs 72.45/USD on March 28, 2021, it has depreciated to around Rs 75/USD on April 12, 2021. The gold prices in the international market have remained at around $1710/oz level in the last 15 days, whereas in the Indian market, the price has bounced back from a low of Rs 44,423/10 gram to Rs 46,419/10 gram during the same period. This bounce-back in the domestic gold prices can be attributed to depreciation in INR’s value against the USD.
So, as an investor, you get two benefits if you stay invested in gold. One, the value of your investment will grow if INR depreciates further against the USD. Two, with chances of increase in market uncertainties due to the Covid-19 pandemic’s second wave, the price of the coveted metal may touch new highs again in the near future.
As such, if you are an existing gold investor, you should prefer making staggered investments into gold at new dips. Short-term investors may avoid taking a high position in gold. Long-term gold investors should consider every dip as an opportunity to add more gold into their portfolio. Investors could also prefer investment instruments like Sovereign Gold Bond (SGB) and Gold ETF against physical gold. If you are interested in investing in physical gold, you can prefer gold bars over jewellery to avoid payment of making charges and ensure a high degree of purity.
Don’t take an overexposed position in gold by investing all your money in this asset class alone. You should, in fact, try to diversify your investments into different asset classes in complete alignment with your financial goals, risk appetite, and return expectations. Experts suggest that one might limit one’s gold investments to a maximum of 10% of one’s portfolio’s value because prices of gold tend to flat-line over long periods of time despite occasional highs during rising uncertainties resulting in insufficient overall returns.
Lastly, if you want to add more gold to your portfolio to take advantage of the current low prices, see whether your portfolio requires any rebalancing to remain in sync with your financial goals.
(The writer is CEO, BankBazaar.com)