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US dollar value of gold may fall globally, but Gold may not price come down in Rupee terms

 

 



Once again, the festival of Akshaya Tritiya is here and is preceded by the inevitable rush of advertisements for buying gold and gold jewellery . A number of important events in mythology took place on the day of Akshaya Tritiya and, thus, this day is especially holy for Hindus and Jains. Since the word Akshaya means `that which never diminishes', anything acquired on this day is believed to bring success and good luck. The day is considered favourable for starting new projects. It is also considered auspicious for buying gold.

 

From Goa to Odisha and Kerala to Delhi, people buy gold on this day, usually gold jewellery or coins. Since this is also believed to be an auspicious day to get married, it is an additional reason for gold demand to go up. After all, social compulsions form a large part of the gold consumed in India.

Good time to buy gold?

Is Akshaya Tritiya a good time to buy gold? Yes! And not necessarily for religious reasons. Gold still remains the most popular way in the world to hedge inflation as well as crises. India and Indians have always had a special affinity for gold, even though we've always imported almost all of our gold. The fall in rupee gold prices from a peak of about Rs 35,000 per 10 grams to around Rs 27,000 now seems to make it an attractive buy. Add to this the fact that while gold prices may fall in US dollar terms, it is hard to lose money in rupee terms when you invest in gold due to the steady devaluation of the rupee against the dollar.

Broadly the system works like this: When the US dollar strengthens against a basket of major currencies, gold prices fall. This is exactly what has happened and will likely accelerate over the year. However, a strong US dollar also means a weak rupee, which means expensive gold as it is imported into the country and not produced locally. A study of rupee-gold prices over the last 30 years shows that there has hardly ever been any period of rolling five years during which gold prices have been negative, because even if gold prices fell in dollar terms, the diminishing value of the rupee against the dollar more than made up for the slide.

Indian cultural affinity aside, the international community too continues to stubbornly hold on to gold as an investment avenue. The end of the US bond buying programme as well as continued talks of a rate increase in the US have kept gold prices subdued, but it is not down and out yet. Geopolitical uncertainty across the world keeps demand for yellow metal relatively steady. Even the recent crash in crude oil prices did not make much of a dent in gold prices. Factors like a fragile Middle East peace, economic uncertainty in Greece Europe keep large investors from dumping gold.

So I believe one should invest in gold via a systematic investment plan, putting about 10-15% of investible surplus regularly into gold. This can be done by buying gold via commodity exchanges which are open till midnight or via gold ETFs listed on the stock exchanges. Gold can also be bought via mutual funds if a demat or broking account is not handy. Physical gold delivery can be taken from the jeweller as also from the commodity futures markets.

Buy gold as a security, as a risk hedge, as a diversification strategy, as instant liquidity and as an investment. Since maximum gold is bought in India during Dhanteras and Akshaya Tritiya, a good approach is to buy some gold on each festival as part of a systematic investment plan. Buying the first instalment this Akshaya Tritiya could be a great way to start something that will never diminish

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