Gold’s Bleak Outlook

Gold. The word itself brings a lot of joy in the minds of Indians (especially the ladies out there :P). But, is gold a great investment in the current economic conditions ?? Would it be wise to buy gold right now or later in the coming years?? The answer is doubtlessly later in the coming years. Here’s why.

The equity markets have been doing very well from the past 15 months, since the NDA came into power. Global economies are as well picking up and are expected to revive in the coming years. This clearly indicates that, the global equity markets are also expected to do well in the near future which will probably put downward pressure on commodity prices. Indian gold prices anyways are in disparity because of the duty structure, and if these are reduced then the gold prices will decrease further. The import duty has already been curtailed.

Gold is the last investment you can make right now. Reason being very simple and completely market related. First and foremost being the returns, especially long-term returns, have always been lower than the overall equity returns. Returns on gold and gold funds have been negative as compared to equities in short-term, while in long-term they have generated returns of 8-9% levels against 15-16% of that of the equity markets.

Many would be of the opinion that ” Gold is a hedge against inflation“. But today we are looking at consistent inflation levels of 5-6% for the past 8 months and RBI with its FIT(Flexible Inflation Targeting) Policy intends to keep it at a level beneficial to the economy ( As it is said a certain level of inflation is good for the economy to grow). Gold as a hedge as well fails in this situation since there is hardly any inflation persisting.

Right from olden times, there is a lot of opacity that exists in gold trading. This causes a lot of loss for an investor or a buyer if he is not well-informed about the scheme and its loop holes. But never the less, the sellers make sure they make amazing profits from the same( thanks to ever-increasing Indians’ love for gold)

“Buy gold and keep them as gold deposits if you want returns is another myth”. Now when we say returns, always remember it should be more than the current inflation figures. If those are not exceeding inflation, you are not getting returns, but rather losing your value. And gold deposit schemes ?? Really ?? Interest rates of 0.75% for three years is hardly any return. A return of 0.25% per year, which if compared to current inflation of 6% would get you a return of -5.75%. Thank god, gold has appreciation of its value else with gold deposit schemes investors would have been in depression.

Invest in gold only for reducing risk on your overall investment portfolio, because they truly are a hedge against the highly unpredictable downside of the equities. To all those who already bought gold at the high rates of 27000-28000 levels, it will definitely help you in reducing the downside if at all you have invested in equities. Others, wait for a while, this bull run might not last for more than a year or two ( the Modi effect is already showing sign of fading away). The best use of your money as of now would be investing into equity directly or through a mutual fund route. Avoid investing into gold, until next year, unless you can put it to use immediately (consumption like in a marriage or to make ornaments. If you are a first time investor of gold, one should prefer coins over physical gold because of the lesser transaction costs of coins. Always remember this one guru mantra : When you equities are doing well commodities(gold) will always lose value and vice versa. No need to buy additional physical gold looking at the current levels of holdings of the Indian families  😉

Happy investing. Thank you.