Should you buy gold on the dip?

From its recent peak, the price of gold has dipped 9%. Will this correction last longer or should you buy some gold now?

Investors looking to make a quick buck from the yellow metal should hold on for now. 

The precious metal lacks major triggers that can drive prices higher again, say experts. In the past three weeks, gold has dipped 9.8 per cent domestically as investors have shunned the yellow metal abroad. International prices dipped 7.5 per cent, even as the rupee appreciated more than seven per cent against the dollar.

On August 28, domestic gold prices surged to a high of Rs 33,265 per 10g as the rupee had fallen earlier against the dollar and international prices surged on fears of a conflict in West Asia.

Even at these lower prices, experts say investors would do well to stay their buying as prices are likely to come down further in the near future. Three factors weigh heavily on domestic gold prices — international prices, the rupee-dollar exchange rate and, of late, customs duty, which has been raised by 10 per cent since the beginning of this year.

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Says Ajay Bagga, head, wealth management, Deutsche Bank: “Most of the run-up in gold prices is behind us. The rupee is stabilising and international prices of gold have been coming down.”

A tapering in the US Fed's bond-buying program is expected to reduce the allure of gold internationally. Hedge funds, which had invested heavily in gold to protect their investments against rising inflation prices and falling dollar, may start to unwind their gold positions. This could keep domestic prices constrained for some time.

Says Bagga: “A US Fed tapering will have a big impact and you could see international prices of gold further coming off.”

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Also, the Reserve Bank of India has curbed gold imports and thus squeezed out speculative buying in the domestic gold market, say market watchers. Investors should also avoid speculating in the yellow metal and invest only if there's a genuine need for gold or if an investment portfolio lacks gold altogether. Various asset classes have been volatile lately and gold helps stabilise a portfolio.

Says Chirag Mehta, fund manager, Quantum Mutual Fund: “There will be volatility across asset markets and, therefore, some exposure to gold is important. Gold is an allocation strategy in an overall portfolio.”

Following a shortage of gold bars in the domestic market due to the import curbs, some gold savings schemes have stopped accepting investments in gold schemes and ETFs. 

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Further, interest rates of fixed income products have increased making debt more attractive. Says Bagga: “Financial investment products such as fixed income are giving higher real rates of return, which is after adjusting for inflation. Hence, gold is losing some of its sheen to these investments.”

Demand for gold jewellery, however, still remains strong. Hence, investors agree that prices will not correct much in the near future. Says Mehta: “Consumption is there to stay. People will shy away from volatility and will wait for prices to stabilise, but those who need the metal for consumption will still buy it.” 

Experts say that the US Fed tapering of its bond-buying programme will dampen sentiments in gold in the short term, and keep gold prices subdued for a while. Hence, investors need not rush to buy gold as investors are likely to find better buying opportunities at lower levels. For now, investors could have about two-three per cent in gold, say experts.