Gold has hit a historic high of near Rs 40,000 per 10 grams, depending on which city you are in. It has beaten every asset class including equities, debt and real estate by a margin. Here are 4 reasons we think gold 's upside maybe limited.
1) 30% gains this year
Gold has shown returns of near 30 per cent this year. We believe that it is unlikely that we will see further gains this year. In fact, there is likely to be a sharp slowdown in the demand for gold, as prices keep steadily rising.
In the past, we have seen that any sharp rally, has led to gold prices stabilizing for many months and almost years. In fact, for many years gold was stuck in a tight range of Rs 28,000 to Rs 31,000 in India. It is unlikely that we will see a further rally in gold in the coming days.
2) Most of the good news for gold factored in
Most of the good news for gold has been factored in. Take for example the possibility of a global recession. If we do not see one, gold prices are likely to fall and equity prices rise.
This also means that the US Fed would not be reducing interest rates quickly, which is not good news for gold. In any case, all the positives for gold, including a sharp fall in interest rates have already been factored in.
3) Huge buying and selling differential
The problem with gold, epecially physical gold is that there is huge buying and selling differential, which often leads to profit margins being reduced. Also, there are issues with buying and selling physical gold in quantities, including their storage. In shares and debt, there is no problem faced with liquidity.
Of course, the one good thing is that you can buy Gold ETFs, which are traded in the electronic form, which tracks physical gold.
4) Buy for diversification only
Buy gold only for the purpose of diversification. Ideally, one should diversify their holding. Placing about 10 per cent in gold, is a good idea. Beyon that for the purpose of investment, at a price of around Rs 40,000 do not expect returns, unless there is economic chaos around the globe, which is unlikely at this stage.
In short, once there is a sudden rally in gold, like we seen after the Lehman Brothers crisis, one noticed that gold barely moved for the last many years. It won't be a surprise if we see the same trend persisting.