Gold may not yield sparkling returns, yellow metal loses glitter with dollar gaining strength

Preeti Kulkarni, ET Bureau | 8 Aug, 2013, 10.07AM IST

Many retail investors in India believe thatgold prices move only northward in the long term. The upward march of the yellow metal in the last decade or so has cemented their faith in the precious metal. However, they may have to change their opinion, say investment experts.

Many financial experts believe that the goldportfolio is not going to offer sparkling returns in the coming days. This is despite gold prices in India being relatively higher due to the rupee depreciating against the US dollar. In dollar terms, the yellow metal is losing lustre, as an improvement in the US economic scenario is strengthening the greenback.

In the past few years, a weak dollar had contributed to the precious metal's glittering performance. "Gold prices, in dollar terms, saw more than five-fold rise over the past decade, i.e, 2002-2012. This rise can be primarily attributed to two factors. Firstly, the US dollar was depreciating against other major global currencies in the 2002-2007 period. Secondly, as the central banks of developed markets reduced the short-term interest rates to nearly 0%, owing to the 2008 financial crisis, gold started behaving like an alternative currency (currency and gold both being non-yielding assets).

Further, the Euro area crisis and weak global growth was acting in favour in the backdrop," says Piyush Garg, chief investment officer of ICICI Securities. "Going ahead, with the USeconomy gradually improving in relative terms, if not absolute terms, the US dollar may see a multi-year bull run (Euro's pain is US dollar's gain). Combined with this, the rise in US yields on tapering of QE by Fed may render holding gold disadvantageous, owing to its non-yielding characteristic," he adds.

In India, too, gold prices are off the highs of Rs 32,000-33,000 per 10 gram seen last year. The prices are now hovering around the Rs 28,000-mark. However, recently, the Reserve Bank of India imposed restrictions on import of gold, which could put pressure on the supply side. In addition, the government has also increased the import duty on gold to 8% to discourage further purchase of the yellow metal.

"For retail gold investors, it's going to result in an increase in the gold price over time compared to the price abroad. The idea is to make the metal less attractive (at higher prices) to potential investors so as to start diverting this investible surplus towards more productive asset classes (financial assets)," explains Aditya Apte, partner, The Tipping Point.

Time to Book Profit?

Does this mean that it is the best time to offload some of your gold holdings and rejig your investment portfolio? "Domestic gold prices have recovered 15% from their recent lows in the last three months. Individuals, who are looking to liquidate a part of their gold holdings, can liquidate 50% of the portfolio at current prices," says Renisha Chainani, commodity analyst, capital markets - individual clients at Edelweiss Financial Services.

"If gold comprises 50-60% in your portfolio, it is a good time to lighten it. In the financial markets, history does not repeat itself very often, so it is improbable that gold will replicate its performance in the last 10 years," adds Raghvendra Nath, managing director of Ladderup Wealth Management.

However, you shouldn't make this decision solely on the basis of the current prices. Your requirements should be the primary consideration. "Base your decision on your needs and portfolio position, rather than on market moves alone. If your gold holdings are for investment purpose and have skewed away from your asset allocation, you may sell some to balance your portfolio. Do remember to take into account the trading cost and tax impact, too, while re-balancing," says Apte.


Buying at Current Levels

So far, rupee depreciation has partly insulated domestic gold prices from a fall that has been experienced in other markets. However, this artificially high price level does not make gold an ideal investment avenue. "It does not make sense to buy gold in the next 2-5 years. Fixed income is safer and a more remunerative asset class now as FD rates have gone up. They are a better bet compared to an asset class (gold) which is seeing uncertainty," says Raghvendra Nath. Many investment experts believe that fixed maturity plans (FMPs) and fixed deposits could offer better returns than gold in the current environment.