Gold Glitters: As Good As It Can Get!
Gold is the talk of the town this monsoon season. Geyatee Deshpande identifies factors driving the gold prices higher and advises being cautious despite gold being in the bullish territory. Read on…
Gold has outshined all the other asset classes in 2019 on a YTD basis so far. Gold is up by nearly 17 per cent on a YTD basis, while equity is up by merely 3.6 per cent. As gold competes with equity for headlines for opposite reasons (gold uptrend and equity downtrend) it is easy for investors to be overwhelmed by the yellow metal. Gold, after all, is gold.
Gold is popular as an investment asset all around the world and its popularity has been increasing with every passing year. India being the world’s second biggest gold consumer, Indians consider gold as a status symbol as well.
According to the World Gold Council, since 2001, investment demand for gold worldwide has grown by an average of 15% per year till date. Various reasons are responsible for this demand. One of the important reasons was that after going through economically unstable periods, the market felt that it is safe to hold gold and such other metals in physical form. This increasing demand for gold has consequently led to price rise as well. Over the years, the central banks have turned into net buyers of gold from net sellers as part of their risk management strategy.
India has been one of the largest markets for gold. The metal plays an important role in the country’s culture and beliefs as a store of value, symbol of wealth and status and also as a fundamental item used in many rituals. In Asia and primarily in India, the demand for gold is driven by consumer proclivity of using the metal as an investment, asset and as a part of jewellery largely during the wedding season. In rural India, people who have a limited access to equities or mutual funds tend to hoard gold in huge quantities as a form of investment. According to the World Gold Council, India is expected to have gold consumption of around 750-850 tonnes in FY19 as compared to 760.4 tonnes in FY18. Whether it be due to the maximum number of wedding days or the expectation for gold to perform well, the first half of FY19 has seen an increase in the gold consumption. Over a period of 10 years, India’s gold demand has averaged 838 tonnes. In FY18, the overall gold consumption fell by 1.4 per cent and the demand for coins and bars fell by around 4 per cent.
Somasundaram PR, who is the Managing Director, India, World Gold Council (WGC) said, "India's gold demand in Q2 2019 grew by a healthy 13%, underpinned by robust trade promotions, a higher number of auspicious days and a positive consumer response to softer prices in April and May. Significantly, the demand for bars and coins grew to a 5-year high in Q2. However, the price rise in June and an unfounded expectation of an import duty cut in the fiscal budget brought the demand to a virtual standstill when the quarter ended. Overall, the gold demand in India in the first half of 2019 was 372.2 tonnes, 9% higher than H1 2018, despite a slowing economic environment and restrictions on the movement of cash during the election season. Akshaya Tritiya purchases along with favourable prices were two major factors driving up demand in first half of 2019".
As the global and domestic economy went through various changes, gold prices topped at a three-year high recently while outperforming equities. With an increase of Rs 1263 and reaching an all-time high price of Rs. 38070 per 10 gram, gold performed better than expected. Following the increase in gold prices, price of silver also jumped by Rs. 650 to Rs. 43,670 per kg. Gold with purity of 99.9% surged by Rs. 1,113 to Rs. 37,920 and gold with 99.5% purity surged by Rs.1,115 to Rs.37,750 per 10 gram. In the futures market also, gold hit a new high. In the MultiCommodity Exchange (MCX), the October contract for gold was seen trading at ₹37,956 per 10 gram before it hit a high of ₹38,070.
Finance Minister Nirmala Sitharaman in her recent budget speech for 2019-20 proposed to increase the customs duty on gold and other precious metals from 10 per cent to 12.5 per cent. According to Somasundaram, "We do not expect the hike in customs duty to have a long term impact on gold in India, although it will have a dampening dampening impact on demand in Q3’.
Conclusion
In an environment like today, where there are economic challenges and even policy challenges faced by the financial markets, investors are desperately looking for an investment option that may not only protect their capital, but also provide inflation-hedged returns. While there is no guarantee going by the historical data that gold can provide an inflation-beating returns in the long run, the recent momentum in gold price has caught investors' attention. The underperformance of equities does make gold glitter a lot more than it should realistically.
From investors' point of view, the dilemma is always about asset allocation and timing the asset class. Active portfolio management is all about entering the right asset class at the right time with an objective to make above average returns in the longer run. Right now, gold does look tempting, but there is always a possibility that after the extraordinary performance, the gold prices may inch higher at a much slower pace and the equity prices, after disappointing investors, may move up faster than the gold prices.
The outlook for gold remains bullish given the rise in consumption and investment demand. The sudden surge in gold prices is attributed to central banks buying gold and also increased demand for the gold-backed exchange traded funds. It is possible that gold may reach closer to Rs 40,000 per 10 gram mark in the short to medium term. But the question is whether or not it will be able to sustain at that level and how far can it go from there. We advise investors to start booking partial profits in gold as gold inches closer to the level of Rs 40000 per 10 gram and start looking at opportunities in equity markets more positively.