Gold prices have been on an uptrend in the international markets during June. After consolidating in a narrow range of US $1294 to US $1354 per ounce over the first five months of calendar year 2019, gold prices have given a strong break-out on the upside to mark a five-year high. Gold was trading at US $1384 per ounce in the international markets. In the Indian markets, the price of the August Futures were hovering at Rs 33804 per 10 gram on the Multi-Commodity Exchange. The price was up 2 per cent compared to the previous close. Rising gold prices are expected to benefit investors holding gold in their portfolios. We had written about the risk-reward for gold investors earlier.
Will prices continue to head north?
The prices of gold bounced back in the international markets after the US Federal Reserve decided to leave interest rates unchanged. The US Central Bank made it clear that there is a possibility of cut in key interest rates. This is a clear signal that the interest rates are likely to go down and that makes a strong case for investment in gold.
“We are seeing an upmove of around 12-15 per cent from current levels over the next six months. In the MCX, we could probably hit a level of around Rs 39000 versus the current rate of Rs 33850,” says Pushkaraj Sham Kanitkar, AVP-Technical Research, GEPL Capital.
For Indian investors, gold prices have been in a sideways band for more than five years. Over the past five years, gold exchange traded funds have delivered compounded annual growth of 2.3 per cent. Gold prices in India are influenced by two variables. First is the price of gold in the international market as India imports almost all the gold required. And the second is the currency rate. A weak exchange rate means high gold prices and vice versa.
Factors aiding gold prices
The increasing geo-political tensions in the middle-east makes many investors look for safe havens. This trend is a positive for gold prices. Increasing tensions on trade wars is detrimental to global growth. In such cases, gold can act as a hedge. In addition to consumption demand, safe haven demand for investment purpose, central bank purchases are expected to increase. “After the 2008 financial crisis, many countries became net buyers from net sellers. Last year (2018), central banks added an incredible 651.5 tonnes of gold to their holdings. This gold buying spree from central banks isn’t just the largest in 47 years, but also the second highest annual total on record (only surpassed in 1967, when central bank gold reserves increased by 1,404 tonnes),” wrote Kishor Narne, head of commodity and currency in Motilal Oswal Financial Services in a recent note published on June 19. He further observes that, “The Central bank’s buying spree may not end soon, but the pace of buying could get a little slow as prices have started to rally recently. Till the time uncertainties related to trade wars remain elevated, it is unlikely that gold prices may witness immediate selling pressure.” Narne expects gold to trade in the range of US $ 1435-1440 on the Comex and Rs 34050 to Rs 34400 in near term.
Should you buy now?
Gold has been an integral part of many Indian portfolios. However, many buy it in jewellery form, which has its own disadvantages such as risk of theft, storage cost, purity issues and convertibility to cash at a discount to the market price of gold. Over the past five years, prices have remained subdued. However, ignoring gold totally may not be a wise move.
“The US started monetary tightening and we are in a situation where long duration bonds globally are trading at negative yields. Diversifying our asset allocation across various assets is important from a risk management perspective. Gold is an asset class with scarce value, which will always be perceived as safe heaven,” says George Heber Joseph, CEO & CIO, ITI Mutual Fund.
Gold ETF and gold sovereign gold bond are better options than the physical gold. Sovereign gold bonds (SGB) not only help you track the gold prices but also pays you interest at the rate of 2.5 per cent a year. The capital gains tax arising on redemption of SGB to an individual has been exempted.
However a point to note is gold does not have any cash-flows of its own, the way stocks and bonds do. Hence one should avoid going overboard on gold and restrict investment to a maximum of five to 10 per cent of one’s portfolio.