The yellow metal has made an unexpected recovery as the global economy gets into more trouble. Is it the right time to buy?
The yellow metal has made an unexpected recovery as the global economy gets into more trouble. Is it the right time to buy?
- Apr 7, 2016,
- Updated Apr 7, 2016 5:44 PM IST
The year 2016 has been apainful one for investors so far. Equity markets the world over have beenvolatile, slipping 5-10 per cent in the first two months. However, there is oneasset - - - gold - that has made a strong comeback after lying low for the pasttwo years.
On a year-to-date basis,it has risen 14 per cent in dollar terms and 18 per cent in rupee terms. Incomparison, bond funds gave 8 per cent, and the highest yielding fixed depositreturned 7.5 per cent. The benchmark Nifty fell 10 per cent during the period.
Till the end of 2015,market pundits were writing obituaries of gold, saying it was no longer a storeof value. This was because it had, over the years, moved downhill, almost inline with other assets. When geo-political factors sent shock waves throughfinancial markets, gold was expected to gain due to its safe haven status, butit did not. This led experts to conclude that gold's "safe haven" status ishistory.
However, there is asaying that in financial markets uncertainty is the only certainty. Gold, too,confounded cynics, and rebounded strongly, due to several factors. The biggestone was the soured mood in financial markets that made investors risk averse.They turned to gold. Jayant Manglik, President, Retail Distribution, ReligareSecurities, says,"It's the mayhem in global financial markets that has madeinvestors board this safer asset, sparking an upward march in prices."
However, not everyone inthe deal room is convinced about the recovery. Before taking any side, it isbetter to look at reasons that have led to the rally and see if they willpersist in the coming days.
Chirag Mehta, SeniorFund Manager, Alternative Investments, Quantum Mutual Fund, says while goldremains sensitive to movements in financial markets, its movement will, in thelong term, continue to be dominated by US Fed rate action. "Given that theeconomic health of the US is in question, the Fed could soon tone downprojections about rate rise expectations for this year. Thus, investors woulddo well to recognize the shifting economic landscape by allocating a portion oftheir portfolio to gold. In this volatile environment and era of experimentalcentral banking, it's difficult to forecast whether gold has touched itsbottom. Given the macroeconomic picture, the downside looks limited, and thisyear will likely be an inflection point," he says.
Kishore Narne, AssociateDirector of Currency and Commodities at Motilal Oswal, says a key thing to noteis that even if gold does not perform well in dollar terms, weakness in mostemerging market currencies will support prices in local currency terms.Pricewise, a rally towards $1,280-1,300 an ounce is likely with downsidelimited at $1,030-1,000, he says.
In spite of all thesepositives, a bull run is not in order, says Mathur. "The rise is a mid-termphenomenon and cannot be termed as bull run wherein all global fundamentalshave been factored in the price. From here on, the interest rate trajectory ofthe US central bank, demand from China and India, and growth in China andEurope will be decisive," he says. He believes spot gold prices ininternational markets can possibly move higher towards $1,320 an ounce whileMCX gold prices can move towards Rs 30,500 per 10 gm.
The recent Budget announcementof 1 per cent excise duty on imported gold is another factor likely to prop upgold in the near term. This is a negative for the jewellery industry and maylead to a scarcity of gold, propping up prices.
Experts concur thatretail investors planning to buy gold can wait for the time being. In the nearterm, gold is likely to shoot above Rs 30,000 but one can wait for this frenzyto die down. A correction back to Rs 25,000-26,000 levels in the middle of theyear cannot be ruled out. That should be used to add gold to the portfolio.
A thumb rule says 7-10per cent of one's portfolio should be in gold as it helps diversify and anchorone's portfolio during volatile times.
The year 2016 has been apainful one for investors so far. Equity markets the world over have beenvolatile, slipping 5-10 per cent in the first two months. However, there is oneasset - - - gold - that has made a strong comeback after lying low for the pasttwo years.
On a year-to-date basis,it has risen 14 per cent in dollar terms and 18 per cent in rupee terms. Incomparison, bond funds gave 8 per cent, and the highest yielding fixed depositreturned 7.5 per cent. The benchmark Nifty fell 10 per cent during the period.
Till the end of 2015,market pundits were writing obituaries of gold, saying it was no longer a storeof value. This was because it had, over the years, moved downhill, almost inline with other assets. When geo-political factors sent shock waves throughfinancial markets, gold was expected to gain due to its safe haven status, butit did not. This led experts to conclude that gold's "safe haven" status ishistory.
However, there is asaying that in financial markets uncertainty is the only certainty. Gold, too,confounded cynics, and rebounded strongly, due to several factors. The biggestone was the soured mood in financial markets that made investors risk averse.They turned to gold. Jayant Manglik, President, Retail Distribution, ReligareSecurities, says,"It's the mayhem in global financial markets that has madeinvestors board this safer asset, sparking an upward march in prices."
However, not everyone inthe deal room is convinced about the recovery. Before taking any side, it isbetter to look at reasons that have led to the rally and see if they willpersist in the coming days.
Chirag Mehta, SeniorFund Manager, Alternative Investments, Quantum Mutual Fund, says while goldremains sensitive to movements in financial markets, its movement will, in thelong term, continue to be dominated by US Fed rate action. "Given that theeconomic health of the US is in question, the Fed could soon tone downprojections about rate rise expectations for this year. Thus, investors woulddo well to recognize the shifting economic landscape by allocating a portion oftheir portfolio to gold. In this volatile environment and era of experimentalcentral banking, it's difficult to forecast whether gold has touched itsbottom. Given the macroeconomic picture, the downside looks limited, and thisyear will likely be an inflection point," he says.
Kishore Narne, AssociateDirector of Currency and Commodities at Motilal Oswal, says a key thing to noteis that even if gold does not perform well in dollar terms, weakness in mostemerging market currencies will support prices in local currency terms.Pricewise, a rally towards $1,280-1,300 an ounce is likely with downsidelimited at $1,030-1,000, he says.
In spite of all thesepositives, a bull run is not in order, says Mathur. "The rise is a mid-termphenomenon and cannot be termed as bull run wherein all global fundamentalshave been factored in the price. From here on, the interest rate trajectory ofthe US central bank, demand from China and India, and growth in China andEurope will be decisive," he says. He believes spot gold prices ininternational markets can possibly move higher towards $1,320 an ounce whileMCX gold prices can move towards Rs 30,500 per 10 gm.
The recent Budget announcementof 1 per cent excise duty on imported gold is another factor likely to prop upgold in the near term. This is a negative for the jewellery industry and maylead to a scarcity of gold, propping up prices.
Experts concur thatretail investors planning to buy gold can wait for the time being. In the nearterm, gold is likely to shoot above Rs 30,000 but one can wait for this frenzyto die down. A correction back to Rs 25,000-26,000 levels in the middle of theyear cannot be ruled out. That should be used to add gold to the portfolio.
A thumb rule says 7-10per cent of one's portfolio should be in gold as it helps diversify and anchorone's portfolio during volatile times.