Is It Time To Break Fixed Deposits And Invest In Gold?

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    Gold prices in India the last 2 years have dropped from Rs 32,000 to Rs 24,000 per 10 grams. Investors are now suggesting to move away from fixed deposits into gold after gold rates in India fell to a 4 year low. Does it makes sense at the moment to break your fixed deposit and invest in gold. Let's take a look.

    Gold Vs Fixed deposits from a one year perspective

    Is It Time To Break Fixed Deposits And Invest In Gold?
    Bank fixed deposits offer an interest rate of around 8-8.5 per cent on a one year deposit.

    So, if you are looking at investing in gold it should offer at least this kind of returns. But, gold has to move up by at least 9 per cent considering the price differential between buying and selling gold.

    So, if gold is around Rs 24,000 now for 10 grams, you should expect at least Rs 26,400 in the next one year to match returns. We are not accounting for tax liabilities that could arise on both counts. Also read why gold rates in Indian cities differ

    At the moment for gold to fetch a return of almost 9 per cent in the next one year and match fixed deposits returns looks difficult. Here are reasons for the same:

    1) Movement of gold largely depends on economic chaos or geopolitical tensions. At the moment the Greece issue has also been resolved and it is unlikely to rear its head in the next one year. This means gold is unlikely to rally in the absence of any negative triggers.

    2) Interest rates in the US may rise by at least 50 basis points in the next one year. When that happens money will move from gold to fixed income bearing securities. This will push demand for gold lower and hence gold prices.

    3) Gold demand from countries like India is unlikely to see a solid recovery and the government has been discouraging consumption of gold through duties and a sovereign gold bond.  This is likely to push gold prices lower.

    4) When there is a global economic recovery, gold prices tend to fall as investors chase shares. This is exactly what is happening at the moment. The trend is likely to sustain.

    5) Chinese gold reserves have not been as robust as was expected, which has sentimentally affected prices of gold. 

     Conclusion

    It looks doubtful that gold would rally from the current levels. At the current levels fixed deposits would be a much better bet, as at least your capital stays protected. You might see a slight improvement in gold prices, but, to expect a dramatic recovery is ruled out.

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