Gold investment in 2015- Is it the right time to invest in gold? Gold investment should be a part of your portfolio, but how much should be the allocation?
When the prices are falling, the sales will increase. This is what happens in the case of gold in India. This is because, in India, people believe that gold price will never fall. But recently, we are seeing this fall happening. If you see the historical gold prices, it was volatile. The prices have fallen many times and it took many years to regain the earlier levels.
Gold demand for jewellery is coming down in India. The estimate for the gold demand for 2015 is estimated to grow only by 3% compared to that in 2014. To improve the current account deficit (CAD), the government has enforced the 80:20 scheme which stipulates that at least a fifth of the imported gold should be given to jewellery exporters. This has resulted in large scale smuggling of gold. This scheme was withdrawn recently because of the improvement in CAD.
Though the demand for ornaments will remain in the same level in 2015, the demand for gold investment will come down. This is because of the declining gold prices, and the bullish equity market.
Factors affecting Gold prices
International gold prices will come down when the dollar is strengthened. The revival in US economy may lead to an increase in interest rates in the early part of 2015. If that happens, gold prices may come down in dollar terms.
The growth in equity market and the price of gold is having an inverse relationship. When the equity market is doing well, investors will move towards equity and abandon gold. This can affect the gold prices negatively. The rise in equity market in 2014 is a reason for the poor performance of gold.
The currency price movement can affect the value of gold in local currency. In 2013, the gold prices fell drastically in dollar terms. But in India, the extent of fall was limited. This is because rupee was depreciating during that period against dollar.
Geopolitical issues can affect the gold prices positively. This is because investors feel safe in real assets at the time of war-like situations. The military conflict in Ukraine and the resultant tension between US and Russia is a major reason for the stability in gold prices in 2014. Otherwise, the gold prices would have been badly affected in 2014.
Gold Investment in 2015
The US Fed is expected to decide on an early 2015 rate hike because of better than expected recovery in the US. In that case, gold price will come under pressure. The Indian government is trying to maintain momentum in the economy by fast tracking the major pending bills like GST and Insurance in the Winter session of Parliament. The growth in equity market is likely to continue in 2015. If the equity market continues its bullish journey, it will affect gold prices adversely. The rupee volatility is almost done and the rupee is stabilising at around 60. A strengthened rupee will affect the gold adversely. Geopolitical tensions between the US and Russia is continuing and is not addressed. There are political issues in the Middle East and in China. All these can support higher prices for gold.
Will you invest in Gold now?
Your reason for investing in gold should not be based on its current price alone. You should have a financial plan in place for your different financial goals. As per the financial plan, there should be an asset allocation strategy which comprises equity, debt, gold and real estate. Within that portfolio, if the allocation to gold is not there, you can think of gold investment. Recent bull run in equity market would have taken your equity allocation to a high level, which requires a rebalancing. There is a case to add gold to your portfolio then. But ensure that your portfolio allocation to gold is not more than 10%. Equity has given better risk adjusted return in the long term.
Don’t think that gold prices will not come down. It can!
What do you think, is it the right time for Gold Investment!!!! Please share your views.