Should you invest in gold now?

The rally in the equity markets from August/September 2013 has seen the benchmark indices, the S&P Sensex and the CNX Nifty, move up by 35 per cent till now, with investor preference shifting to riskier assets such as equities.

In contrast, gold and silver, considered safe haven bets in uncertain times, lost 8.8 per cent and 20.4 per cent, respectively, during this period.

Consumer demand (in monetary terms) for jewellery, gold bars and coins dipped 41 per cent in the first quarter of calendar year 2014 to $7,911 million.

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In physical terms, it was 26 per cent lower, at 190.3 tonnes.

All this, in effect, also reflects the investor’s preferred investment choice at a time when the country was gearing up to vote on a new government.

“In addition to the ongoing restrictions to gold imports, India’s consumers faced further obstacles as a result of the elections.

“These created an atmosphere of uncertainty, particularly on the import curbs and whether these might be lifted in the second half of the year, which left many reluctant to buy until a clear post-election picture emerged,” says a World Gold Council report.

Adding: “Further, restrictions were imposed on the free movement of cash and other assets, such as gold, for the duration of the election.

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“While these were intended to prevent electoral corruption, they also had the effect of dampening genuine cash purchases of gold.

“This had a negative impact on demand in the closing weeks of the quarter, which continued into Q2 (the April-June quarter).

Says C P Krishnan, wholetime director, Geojit Comtrade: “After hiking the duties, investment-based demand for the commodity became unattractive.

“Volatile domestic currency and restrictions on cash movements during the general election period prompted buyers to stay away from the bullion market.

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“Also, a shift towards other asset classes like equities, performing well for the past few months, adversely affected demand for the yellow metal.”

And: “Demand for silver in both the physical form and for investment was skinny during that period.

“Besides, speculators’ actions in silver prices were comparatively high, which also made the commodity volatile.”

Should you invest?

Yet, now that the equity markets have got what they were rooting for in terms of poll outcome, and with most research houses raising their targets for the benchmark indices, does it still make sense to invest in precious metals?

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Analysts suggest one can invest from a long-term perspective at current price levels but those seeking to invest for the short term can wait till prices correct further.

Geopolitical tensions between countries, growth outlook of the US economy and demand from the top consumers, China and India, are the prime factors that will have an effect on prices.

However, demand in India is likely to strengthen, while that from China will probably decline over a period of time.

“On the domestic front, a major rally in bullion is not anticipated, as the prevailing signals of a stable economy will probably strengthen the currency and might adversely affect bullion.

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“For gold, the Rs 28,000-32,000 level (for 10g) would be an ideal range in the immediate run. Abroad, gold might steady in a choppy range of $1,080-1,550 an ounce,” says Krishnan.

At the global level, analysts suggest gold prices remain at elevated levels only due to the Russia-Ukraine tension, which now seems to be easing.

Hence, there is a strong case for prices to cool.

Shriram Pitre, senior vice-president and head of commodity and currency research at Anand Rathi, says: “I don’t think it is the right time to invest in precious metals.

“Investor preference is shifting to equity, which does not augur well for prices of precious metals.

“Going ahead, silver prices can touch $16.50-17 an ounce (currently $12–15s) over the next 12–18 months.

“For gold, $1,275 (per 10g) is an important level to watch. A breach on the downside can take it to $1,050-1,100.”