The relentless rise in the price of gold over the past year has left investors insecure. While existing investors wonder if they should make significant capital gains from their investments, new investors are unsure whether they should invest at current levels.
- On Wednesday, the US Federal Reserve said it would keep interest rates near zero until 2023. If the dollar index stays low and causes inflation to rise in the future, many believe that gold prices will fall closes or even ramps up, until a covid -19 vaccine is in the offing and the global economy shows signs of recovery.
How have gold prices evolved?
Prices began to rise from May 2019, reaching a high of more than 50% in just over a year, from $ 1,250 per ounce to $ 1,900 or more now.
- In India, gold prices have risen from around Rs 32,000 to Rs 10 to almost Rs 52,000 during the same period, representing a profitability of almost 62%.
- As gold is an imported product, the depreciation of the rupee adds to the benefits enjoyed by Indian investors.
- In dollar terms, gold peaked at around $ 2,080 an ounce on August 7; The Indian market price touched Rs 58,000 for 10g that day, with gold trading at a premium of almost Rs 2,000 over MCX's commodity exchange price.
- Since then, prices have fallen by around 7% in the international market and by around 10% in the Indian market. The decline was most pronounced in India, where the rupee appreciated by more than 2 rupees during this period.
- With international prices cooling from highs, the premium for physical gold is gone. Demand is expected to increase in India closer to Diwali.
Why have the prices gone up?
The main reason for the increase in the last five months has been the pandemic, its impact on businesses and economies, and growing concern about the global recession. Concerns about negative growth rates have pushed central banks and large investors toward gold.
- The weakness of the dollar, inversely related to gold, was the other reason for the rise in prices. As central banks, including the Fed, cut rates and injected huge amounts of liquidity to support the economy, the dollar weakened and gold rose.
- Traditionally viewed as an asset class that preserves its value, the demand for investment in gold has grown along with increasing uncertainty.
- The expansion of paper money generally tends to drive up gold prices, with higher prices supported by major purchases by major central banks in China and Russia over the past two years.
- While gold alone does not produce economic value, it is an effective tool to guard against inflation and economic uncertainties. It is also more liquid than real estate and many debt securities.
Could prices increase further?
- There is a widespread sentiment among commodity traders and experts that gold may remain strong, this is due to factors such as the increase in the number of Covid-19 cases and a signal from the Fed to keep rates low for the next three years.
So is gold a good investment for you?
- While trading in gold is not a good idea due to today's high prices, experts say retail investors can periodically buy gold. Financial planners say gold should always make up between 5% and 10% of an investor's total asset allocation.
- Financial advisers say gold shouldn't be viewed as a short-term asset. Gold is a generational asset, and after a few decades it doesn't matter what price you bought it for People are investors, but they think like traders even when buying a long-term asset.
- A cut in interest rates by the RBI led to a drop in bank interest rates for small savings and term deposits. Many analysts claim that buying gold can start around Rs 50,000 per 10g, which is close to $ 1,900 per ounce as a spot price that is expected to hold. Some see gold will drop to Rs 65,000 per 10g, or about $ 2,400 per ounce, by December 2021.
How to invest in gold?
Almost everyone agrees that unless you are buying jewelry for consumption, the investment should be made through gold sovereign bonds. They offer investors a price appreciation as well as a fixed coupon of 2.5% per year on their assets; In addition, they are in paper or demat form and are issued in the name of the investor, thus addressing security concerns. While interest earned on gold bonds is added to the income of holders and taxed at the installment rate, capital gains at maturity are exempt from tax, making them much more attractive than owning them. physical gold.
- Gold bonds have an eight-year maturity period, but investors have the option to exit after the fifth year. To provide greater liquidity, the bonds are listed on the stock exchange within fifteen days of their issuance and can be traded. However, trading volumes depend on liquidity in the secondary market.
What if gold prices fall?
Analysts warn that we must guard against a drop because the prices of gold, like those of other commodities, tend to move in long cycles. As long as the recovery picks up (now expected only by the end of 2021), investors will begin to allocate more funds to risky assets such as stocks, real estate and bonds, and retreat from safe havens such as gold, the US dollar, government debt and the Japanese yen. . Historical trends show that when stocks and risky assets start to rise, gold generally declines, as it did in 2011-2015.
- An investor should keep an eye on the $ 1,900 and $ 1,800 (per ounce) levels in the short to medium term. A drop below $ 1,800 would signal the start of a downward trend in gold prices. These should be exit levels or stop-loss levels, depending on the risk appetite, for investors entering at current prices.