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Has gold lost its sheen?

By Perfios Money Manager
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So what has caused a sudden drop in the prices of gold in India?

 

There are various factors that have played a part-

 

US Economy is showing signs of improvement and US dollar has moved up on the hope that the crisis may finally be over.

Cyprus is likely to sell gold to partly fund its financing requirement. Although its gold holdings are small, the worry is whether other countries seeking bailout would follow suit. This would not augur well for gold.

With the possibility of interest rates going up in US, investors may shift money from gold to US Treasury bonds. Also given the fact that equity markets are showing signs of recovery, the risk reward would tilt in favor of US equities than gold.

Has gold lost its sheen?

However, there are problems aplenty which may suggest that the bull run for gold is not yet over
A big question is whether US economic recovery is really sustainable. The ground level situation may not have improved as much. Hence any monetary easing if it were to happen would push gold price up.

With concerns over the reserve currencies such as Dollar and Euro, central bankers across the world may look to add to their gold reserves as an alternate reserve currency.

Locally, given the current account deficit in India, the rupee may not appreciate in a hurry and a depreciating rupee would mean that domestic prices of gold would remain cushioned against any fall in the international market.
The drop in gold prices has brought about a renewed interest in gold purchases. Those who were holding back on account of steep prices are now flocking to buy gold.

So what should one do now- buy, hold or sell?

This is a difficult one to answer. If you are a buyer of gold jewellery, the steep fall has now given a good entry point. As an investor, it is always prudent to stagger your purchases rather than take a call on which way the price will be headed. For those investing systematically in gold towards future goals such as children marriage can continue to do so.

It may be good to review the asset allocation to see if allocation of gold in the portfolio has dropped and that could be a trigger to buy some more. Ideally, the allocation of gold must range between 5-10% of the overall portfolio and not more.

Finally, despite the price movement, gold continues to command its place as a solid hedge against inflation and a portfolio diversification tool.

So has gold lost its sheen? You decide.

GoodReturns.in

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