Where Is Gold Headed?

Most investors should have a 5% to 10% allocation to gold for diversification.
They should stagger their investments to mitigate timing risk.

The recent Budget announcement regarding a reduction in the basic customs duty on gold from 15 per cent to 6 per cent significantly impacted the market, causing a sharp correction in its price.

By the end of July 23, 2024, the price of gold had dropped to Rs 68,510 per 10 grams, compared to Rs 72,718 on the Multi Commodity Exchange (MCX) the previous day.

Market experts see this duty cut as a positive step, as the high 15 per cent duty had previously incentivised smuggling.

The reduction is expected to lead to higher imports through official channels, boosting government revenue.

"This Budget move could lift retail demand and help cut smuggling activities," says Navneet Damani, group senior vice-president, head of commodity and currency research, Motilal Oswal Financial Services.

The international market has also seen a dip in gold prices, with a 4.5 per cent correction from recent peaks due to a potential slowdown in seasonal demand.

"This decline reflects concerns over reduced jewellery and retail investment demand, especially in China," says Anuj Gupta, head of commodities, HDFC Securities.

Where is gold headed?

Looking ahead, gold appears well-positioned for medium-term growth.

Factors such as geopolitical tensions, start of the rate cut cycle globally, and concerns over high equity valuations are driving investors towards gold.

"Gold is generally considered a safe haven and has a low correlation with equities. Hence, having an allocation towards gold helps one to reduce portfolio risk through diversification," says Vishal Jain, chief executive officer, Zerodha Fund House.

In the event of a US Federal Reserve interest rate cut, gold is likely to attract more investor attention.

A reduction in interest rates offered by bonds makes non-interest bearing assets like gold more attractive.

In the domestic market, gold demand is expected to rise ahead of the festival season.

"We continue to maintain a buy-on-dips stance for gold with an upside of around 18 per cent from current levels over a 12 to 15 month horizon," says Damani.

Change in taxation norms

Before the Budget, both gold exchange-traded funds (ETFs) and fund of funds (FoFs) were taxed at slab rate.

After the Budget, gold ETFs will become eligible for long-term capital gains (LTCG) tax at 12.5 per cent after 12 months.

Gold FoFs will become eligible for LTCG at 12.5 per cent after 24 months.

Short-term capital gains on both will be taxed at slab rate.

While the taxation of both gold ETFs and FoFs has improved, gold ETFs have become more attractive than gold FoFs as they will henceforth become eligible for LTCG after a shorter holding period.

How to invest in gold?

Investors looking to capitalise on the current dip in gold prices may consider gold ETFs and sovereign gold bonds (SGBs).

"Investors looking for portfolio diversification can consider gold. Gold ETFs can be bought and sold in real time on the exchanges. They are liquid and provide the flexibility of entry and exit. Gold FoFs can be invested in just like any other mutual fund unit without needing a demat account at closing net asset value (NAV)," says Jain.

SGBs can be considered for a longer holding tenure. "It has an eight-year tenure (with a five-year lock-in) and offers an interest of 2.5 per cent per annum," says Damani.

Most investors should have a 5 to 10 per cent allocation to gold for diversification. They should stagger their investments to mitigate timing risk.

Yellow metal: Robust return over the past year

Standard gold closed at Rs 69,625 per 10 grams on August 1, 2024. Above one-year returns are in CAGR. Source: IBJA. Compiled by BS Research

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Feature Presentation: Aslam Hunani/Rediff.com