1. Slowing Demand
The fundamentals of demand and supply for gold have not given me much reason to recommend the inclusion of Gold in one's portfolios. In India, jewellery has been one of the key drivers of the demand for gold.
According to World Gold Council "Gold demand in India was affected in Q1 2012 by a number of factors; a new tax on gold jewellery, two increases in the import duty for gold and weakness and volatility in the rupee. Jewellery demand fell 19% to 152.0t from Q1 2011".
Investment demand, another purported key driver of demand has not had much reason to cheer either. Gold demand stemming predominantly from ETFs and similar products which increased due Akshaya Trithiya has now slumped down and they were down by 46% from the previous year at 55.6t".
Moreover, the fresh tension at the Eurozone is another cause of worry. Many of the nations are facing the problem of slowdown and if the Central Banks of the respective countries decide to sell their Gold reserves to raise money, then there will be more supply of Gold in the system which is bound to lower the gold prices according to the laws of demand and supply.
2) No fair value of gold
The truth is that there is no standard valuation method which can be used to measure the exact value of Gold.
While stocks and bonds produce a series of cash flows which can be discounted to present value to gauge attractiveness, gold produces no cash flows for investors to value or discount. As a matter of fact, gold actually costs investors cash flow - it makes you pay to hold it. Be it holding physical gold in a vault of some bank, or, holding gold on paper via an ETF, gold does cost investors cash to hold.
The lack of a proper valuation method to analyse gold leaves us with guesses as to what could possibly be the fair value price of the metal.
This makes the yellow metal very volatile which leaves a room for speculation on Gold prices. One can always find some analyst saying that prices of gold is further going to rise and one set of analysts offering different opinion.
As case for investment into Equities.
Good returns on equity investments are typically made on investments made in bad times. I believe dips should be seen as buying opportunities and one should increase their asset allocation in the equity space.
Investors should not think about short term gains when investing into equities. Investing systematically makes more sense in this current equity market volatility.
Volatile and falling markets are the best time to enter in to the equity markets, but sadly, investors follow the opposite route and they don't mind to book losses in equities and invest in Gold or in Debt.
Let us start thinking beyond investing in Gold. Boost your investment returns by adding Equity into it. It will be volatile in the short term, but it will be the clear winner on the long term.
With equity markets slumping in recent times, I think that there lays an opportunity for investors to consider adding to their favorite markets by observing their respective valuations and through rupee cost averaging for the longer term. For investors who have not yet invested into gold or precious metal funds, remember that in the immortal words of Shakespeare, "all that glitters is not [just] gold".
Author: Debanjan Guha Thakurta, Fundsupermart.com
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