Planning To Invest In Gold Ahead Of Diwali? Watch Out!

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In Nov 2011, gold was trading at Rs 26,250 per 10 grammes. Today, gold prices per 10 grammes is around Rs 26,800 - almost at the same level gold was trading 4 years back.

Gold has not given any returns as an investment in the last few years. At the same time other asset classes like equities, fixed deposits and even real estate has done much better.

Planning To Invest In Gold Ahead Of Diwali? Watch Out!
Diwali is always considered as an auspicious time to invest. Individuals look at various investment options ahead of Diwali.

But, the question is: would gold give you returns at least with a one or two year holding time. The answer is probably not. Now, let us see why, you should not invest in gold this Diwali.

Check daily gold rates here

1) US Federal Reserve hike in interest rates will not be good for gold

Indian gold prices track international gold prices. If gold prices fall in the international markets, they tend to fall in India as well.

One of the key factors that would remain crucial for markets would be what the US Fed does with interest rates going forward. Since the last many years, interest rates in the US have remained at near zero levels. But, that would most probably change in the month of December, with analyst hinting at a first rate hike in the US.

If the US Fed does indeed hike interest rates, people would sell safe haven assets like gold and park money in government securities, which would start yielding more returns. Thus, gold prices would fall and if there is further increase in interest rate by the US Fed, gold prices would likely fall further.

2) Geo political tensions and gold prices

When there is geo-political risks, gold prices tend to rally. At the moment there is unlikely to be anything of that sought happening anywhere around the world. Therefore, gold is not going to get any support from such events.

3) The rupee and gold prices

When the rupee falls against the dollar, gold gets more expensive in India. This is because India imports all of its gold requirements and fluctuations in the currency rates affect the prices. For example, if the rupee falls to Rs 66 from the current levels of Rs 65 gold would become more expensive, assuming international prices stay steady.

At the moment the rupee is steady and it is unlikely to move in any direction. With the current account deficit, well under control, it is unlikely that the rupee will fall too much and hence gold prices are not going to move higher because of the currency.

Clearly, at the moment it seems difficult to see why gold prices could even give 10 per cent returns from here. In the last 3-4 years, the prices of gold have gone nowhere.  In fact, the returns of gold has under performed the returns from shares. Investors are increasingly betting on shares and stocks as growth momentum across the world gathers steam. The trend is likely to continue at least for the foreseeable future.

GoodReturns.in

Read more about: gold
Story first published: Tuesday, November 3, 2015, 9:02 [IST]
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