Gold prices have been on a roll since the start of the year. If you had to invest in the precious metal at the start of the year you would have seen your money grow by 20 per cent at the very least. Now, there are reports that gold prices are seeing the best demand of the festive season, since the last 4-years. What is the reason for the surge in demand for gold this year. Let us take a look and see if gold is a good investment in 2016.
The price rise since start of the year
Gold prices were hovering around the Rs 24,000 levels mark, at the beginning of the year. Today, gold prices as we head into the festive season has rallied to the Rs 29,000-Rs 30,000 levels. Despite the rise in prices, there are reports that we are seeing the best demand during the festive season of the last 4-years. Should you then be buying gold at such elevated levels? We tell our readers, in our analysis below.
How do gold prices move in India?
Gold prices in India, do not depend on gold demand in India. They depend on the international prices of gold. When gold prices in the international markets go higher, gold in India moves higher. So, what do international prices of gold depend on? Many things like the dollar movement and also interest rates. When the dollar falls, gold prices rise and when dollar goes higher, gold prices fall.
US Fed interest rates, key to gold movement
In the more short term, gold prices would depend on interest rates in the US. We believe that the US Federal Reserve would hike interest rates in the US in its December meeting. When interest rates are hiked, gold prices would fall. This is because investors sell gold and start buying government securities, which begin to give a higher price. This is one of the reasons, that gold prices start falling. In some quarters, there is a belief that the US Fed would certainly increase interest rates in the US in December.
Currency movement also important
The currency rate movement is also important. Remember, that we import gold, so we pay in dollar terms. If the rupee moves lower against the dollar, gold prices would fall and vice versa. Let us give an example. Say, you import gold and the price of the rupee against the US dollar was 66. If the price goes up to 67, gold prices would become even more dearer. On the other hand, if it becomes 65, you pay less.
Should you be buying gold now?
Gold has rallied in the last few months and it is really not attractive, as it was at the start of the year. To chase higher prices is fraught with risks. We believe that gold prices would remain in a range until December. It would trade in the range of around Rs 29,000 to Rs 30,000 for 22 karats.
In case, the US Fed does hike interest rates in the month of December, we believe that there could be some drop in the price of the precious metal. At such time it would be good to buy into gold. If you get gold at around Rs 26,000 to Rs 27,000 levels, it would not be a bad bet to invest for the long term.
Buy gold ETFs
We suggest that you buy Gold ETFs, in place of physical gold, because gold ETFs cannot be stolen, as they are held in electronic form. They also track gold prices and also you do not have to incur storage costs.
Gold ETFs are very liquid and unlike physical gold jewelry you do not have to pay making charges. So, when you sell, you get the actual price of gold. Most of the gold can be bought and sold through the exchanges in India.
What if you still want to buy physical gold?
Despite its disadvantages, if you still want to buy physical gold, go for gold bars and coins, as they can be easily sold and there is no making charges involved, like jewelry, which on selling fetches low price.
The article is not a solicitation to buy, sell in gold or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.