Gold has had a superb run in 2016, with prices scaling as high as Rs 32,000 for 22 karats gold, from just about Rs 24,900 per 10 grams at the start of the year. Various cues, including global risk aversion and solid global liquidity have pushed gold prices higher. However, would the good run in 2017 continue?
Higher US interest rates could push gold prices lower
Indian gold takes cue from international gold rates and internationally gold rates have dipped. When Donald Trump was elected the US President, spot gold in the US jumped to $1282 an ounce. However, the precious metal is back to levels of $1222 an ounce. There are plenty of reasons for the same. The most important of these is the fact that bond yields in the US are rising. When bond yields in the US rise, investors rush to sell gold and invest in government owned securities in the US.
But, why are bond yields in the US are rising?
There are a number of reasons why bond yields in the US are rising. The first and the foremost is that there are fears of inflation in the US. When inflation rises, the US Federal Bank would be forced to hike interest rates. What this also means is that a hike in interest rates would increase the bond yields in the US, pushing gold prices lower.
Rupee unlikely to depreciate too much
When the rupee falls against the dollar, gold becomes expensive in India. The rupee has already gone past 68 levels. There are some FCNR Deposits that are being redeemed and the redemption is likely to be over by end of the year. So, whatever depreciation we have seen in the rupee is unlikely to be sustained in the near future. When the rupee appreciates against the dollar, gold prices will move lower.
Why physical gold can hardly make money for you?
If you are looking to buy gold, do not buy it as an investment. When you buy gold coins for investment purposes, it is extremely difficult to make money, as there are taxes of almost 10 to 15 per cent that are levied on them. So, to make a decent return, gold prices must rally by at least 25 per cent every year, which is almost impossible.
Buy the precious metal for diversification purposes
It is a good idea to buy into gold, only when you want to diversify your holding. Let us say that you have put all your money in shares. Now, if equities collapse you could be in deep trouble. So, it is best to place some amount of money in gold. This is especially true, when there are geo-political tensions or the world economy is seeing very dismal growth rates. Under such circumstances, gold would serve you as a perfect hedge as prices go up due to these events.
Outlook for Indian gold in 2017
We believe that gold prices in India would fall in 2017, as investors chase high yielding US government securities. The government in India is also unlikely to encourage consumption of gold too much. So, as an investment, it may not be the best bet around.