This year gold has been the best asset class, beating returns from mutual funds, equities and debt instruments by a distance. In the last 1 year, gold has generated returns of nearly 40 per cent, which is really unbelievable.
Will gold prices in India fall?
Let's understand when gold prices tend to rise and if any of these factors are playing out. Gold prices in India tend to follow gold prices traded in the international markets. So, if gold prices in the international markets fall, we may see gold prices in India too following. International gold rates tend to rise when global interest rates are low, there is monetary easing and when there is economic chaos or geo-political tensions. The precious metal price tends to thrive under adverse conditions.
Some of these are already playing out. For example, global growth rates are likely to slump because of Covid-19. The central banks across the globe including the US Fed are engaging in quantitative easing, which means releasing billions of dollars in the economy to push growth. When this easing happens money finds its way into gold as well. In fact, we are seeing record amounts being invested in gold ETFs. Also, when interest rates are low or negative investors buy into gold, by selling debt.
In many developed countries interest rates are near zero, while in some they are even negative. All this tends to push gold prices higher, which is the case right now.
It's unlikely given the above factors that gold prices would fall dramatically from these levels. In fact, every dip in gold prices would be used as an opportunity by investors to buy, thus supporting prices.
Should investors buy into the precious metal now?
There is a possibility that prices may see dips, though not sharply. Buying into dips would be the right strategy, rather than buying at peak levels. On Tuesday, we saw a sharp dip in gold prices by nearly Rs 4,000 and the precious metal bounced back again. This is likely to be the case going forward.
However, we would advise investors to buy gold in the electronic form only, if they desire to do so. The best way to buy gold would be ETFs. They are freely traded on the exchanges and track gold prices. There is no question of theft like physical gold and they do not need storage. They are also very liquid and can be sold at anytime. So, if you are looking to buy on dips, go for gold ETFs only.