Is it a good time to buy gold since it has declined by 20% from peak levels?

·Columnist
·4 min read

The economic recovery after the pandemic, vaccination programs around the world and an increase in bond yields have led to the decline in prices.

Gold is one of the most favoured investment options for our countrymen. India tops the list in consumption of gold jewellery in the world. Along with China, India accounts for close to 60% of world consumption.

However, gold demand in India hit a 25-year low at 446.4 tonnes in 2020, compared with 690.4 tonnes in 2019 due to the COVID-19 induced lockdown and on account of record high prices, as per the World Gold Council.

Total jewellery demand in India for 2020 was down by 42% at 315.9 tonnes as compared with 544.6 tonnes in 2019. Total investment demand for the calendar year was down by 11% at 130.4 tonnes in comparison with 145.8 tonnes in the previous year.

Gold is considered as a hedge to inflation. It tends to perform well in times of economic crisis. Normally one should have around 10% of a long term portfolio in gold. It helps in diversifying the portfolio of assets.

If we compare the performance of gold versus equity investment over the last few years, gold has left equities way behind from 2008 to 2013 primarily due to high inflation during the period.

Since 2014, equity returns have been beating gold returns by a huge margin as the economic scenario started to improve. The trend reversed in 2019 and 2020 in the pandemic year amidst lockdowns and the work from home scenario.

Source: www.equityfriend.com

Gold prices are dependent on the supply-demand dynamics, geopolitical events, and value of the US dollar. The supply of gold is limited and it cannot be valued like other financial assets, equity or debt, on the basis of cash flows.

Inflation is inching up and bond yields are hardening across the world. The equity markets have been tumbling across the world due to higher crude oil prices, rising coronavirus cases and the reasons mentioned above.

Now since the prices have declined, is it a good time to buy gold? Have the gold prices bottomed out?

This is a million dollar question akin to timing the markets. Opinion is divided on this.

Legendary investor Jim Rogers predicts a gold boom. "Both gold and silver are going to go through the roof. History shows that whenever people lose confidence in governments and money, all of us peasants buy gold and silver. Peasants like me have some gold in the closet. We like to have some silver under the bed."

On the other hand Credit Suisse is negative on gold. "Gold has been losing momentum as economic growth optimism is growing. In recent weeks, the spike in the US Treasury yields, as well as a rebound in the US dollar, also weighed on gold prices.”

“Moreover, a rapid progress with vaccinations and substantial additional fiscal stimulus have boosted risk appetite. Given this backdrop, gold investors are taking a cautious stance, resulting in sharper exchange-traded fund (ETF) outflows," it added.

As a result, it has lowered gold 3-month and 12-month forecasts to $1750 and $1700 per ounce. Currently gold price is trading in this range.

The marriage season in India is approaching. If you have to buy gold for this purpose, go ahead and buy gold, as prices are not likely to drop significantly from current levels, even as per Credit Suisse.

If you wish to buy gold for investment purposes, one line of thought suggests this year may not fetch any significant upside. However, for the long term, since gold is a hedge to inflation, prices may move up as per the other line of thought.

So if you have less than 10% of your portfolio in gold, it may not be a bad time to buy. However, spread out your purchases and do not invest in lump sum. Gold ETF or the upcoming sovereign gold bond (SGB) issuances should be the preferred option.

SGBs offer 2.5% interest plus the price appreciation. Also, there is no taxation of gains at maturity. However, they have a maturity of 8 years. ETFs offer liquidity benefits.

If you have more than 10% gold in your portfolio, it’s not a good time to sell. It’s advisable to hold on for some period, probably a year or so, to make higher gains.

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