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The price of gold has fallen 18.75% in the past six months in dollar terms in the international market. However, the yellow metal has lost only 13.45% in India during the same period. Globally, with the advent of 'risk on trade', an environment in which investors are willing to take risk, gold prices are expected to remain under pressure.
However, the story may be a little different in India – the weak rupee may support gold prices. Also, the legendary Indian appetite for gold is likely to emerge every time the precious metal takes a beating. Sure, the government has been making a lot of noise about curbing gold imports, but it remains to be seen how it will materialise. In short, Indian investors have many factors to consider before taking a call on gold. Experts believe that gold prices are likely to hover in a narrow range and they are asking not to go overboard shopping for gold on dips, at the same time not shunning it altogether.
Gold prices may remain in the range of $1,350 to $1,450 per ounce in the near term. Retail investors should take exposure to gold through systematic investment in e-gold and gold ETF. Retail investors should look at gold more as portfolio insurance, than taking active trading calls on it, say experts.
The Rupee Factor
Rupee price of gold is dependent on two factors — its price in dollar terms in the international market and the rupee-dollar exchange rate. If gold prices in international market remain stable, but dollar strengthens against rupee, then gold turns costlier in rupee terms, and the other way round. That means, if you are expecting the rupee to weaken further against the greenback, you should buy gold, as its value will appreciate with a fall in the rupee against the dollar.
In recent times, the rupee has been on a wet pitch. After hitting a high of . 51.83 against the greenback on October 5, the rupee has been on a downward spree, and now quotes around 57.75 a piece. Gold prices too have inched up from recent lows, in the international market and weak rupee has been further fuelling gains for Indian investors. In the last fortnight, Indian gold investors have made 4.71%. But the rupee may gain from here and the appreciation in gold prices in rupee terms may be capped. RBI may intervene in the forex market and the expectations of 60 rupee a dollar may not materialise in the short term, thereby capping gains in gold.
Though the rupee's appreciation may be a spoiler for gold investors in the short term, you must keep an eye on dollar prices of gold too. Global economy is perceived to be growing and there are some green shoots. Also quantitative easing done by Federal Reserve is expected to taper off. All these factors have led to lower investment demand for gold, which should ensure weakness in gold prices. Though a technical bounce back cannot be ruled out, he adds. Gold prices are in a consolidation mode and $1,420 is an important level. If gold crosses $1,420, it may go up to $1,475. Experts believe that gold will take some time before it makes a definitive move. In the meantime, the volatility may continue.
Interventions by central banks worldwide such as incremental money supply and artificially keeping the interest rates low for a long time makes a case for strong gold prices in the medium term.
A case in point is ongoing quantitative easing in USA. Bank of Japan too has announced a stimulus program to revive Japanese economy. Central banks all over the world have been resorting to money printing.
More money in the financial markets is expected to lead to inflation in the medium term. In such a scenario, gold can be a good hedging option. Given the extreme uncertainty in the short term, don't take trading positions in gold. However, stick to your gold holding as per your asset allocation plan. But remember to limit your exposure to 5% to 10%. In the meantime, go for systematic investment plan route to reach your asset allocation target.
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