Gold continues to play a major role in the economy of nations including India. Though there have been fluctuations and downswings in recent years, the intrinsic value of the yellow metal holds it in good stead as a stable investment even now.
What is Gold Investment?
There are different types of gold investments. For instance, people can buy gold futures and options in addition to investing in gold funds or gold ETFs. Individuals can also invest in gold by buying shares in a company that mines gold or they can directly buy gold in the form of bullion or coins. Many people also believe that buying gold jewellery is a type of gold investment but actually, it is not. This is because jewellery prices include the cost of making them, which can be around 10% to 20% of the total cost, and hence do not reflect market conditions.
Advantages of Gold Investment:
Certain factors are responsible for gold being a favourite among investors. Some of these are:
- High liquidity and universality of gold make it a favoured choice for investors across the globe. It can be cashed easily and it is accepted as a mode of payment and security worldwide.
- The value of gold rises during inflation as it remains more stable than cash or any other asset.
- Gold is a good way to diversify an investor’s portfolio because it moves inversely to stock and currency value.
- The global gold value remains unaffected by local political chaos. The demand of gold may go up or down but it never ends.
Gold Investment in 2017:
To understand whether gold investment is a good idea in 2017, you need to take a step back and understand how gold prices rise or fall.
Simply put, the gold rate is determined by its supply, demand, and value as an investment in the current economic scenario. In India, they often fluctuate due to government policies and certain economic events such as the recent demonetisation. As a rule, investors rush to buy gold when there is an inherent weakness in the stock market or in the economy. The reasoning is that the precious metal will hold more value than stock or bonds when the markets tank.
Experts suggest that the best time to invest in gold is when you are expecting an inflationary period. Experienced investors already know that inflation is unlikely when the local currency; i.e. Rupee is strong. However, increased currency printing by the Reserve Bank that will result in more cash in the economy (and will lead to increased prices) is a potentially good indicator to start investing in gold.
Media reports and opinions of experts suggest that inflation may see a mild increase in the near to mid-term. This is supported by EIU and IMF data that show inflation rising slightly in the next year or so.
Another good way to forecast gold investment prospects is to analyse the pertinent financial data of the previous years. For instance, between November 18, 2015 and November 17, 2016, gold ETFs returned 16% and outperformed the other asset classes. In the domestic market, gold rates in India moved from Rs. 25,000/10gm to Rs. 31,000/10gm in the same period. This rise was led by a variety of global factors such as fall in global equities, inflows in bullion funds, and concerns over economic growth. In addition, gold has seen a 28% drop in its value since 2013 and some gains were inevitable even with a small rise in prices. However, returns over three to five years have been negative. As of now, experts believe that gold prices will fall further in 2017 before they start climbing.
The question to ask then is on the holding period. With only marginal increase in Indian inflation numbers and prices likely to remain low for the next 1-3 years, the metal may not prove to be a good short-term investment, according to experts. The long-term prospects are however, definitely brighter.
In addition, investors need to look at a few factors in some detail to understand whether they need to invest in gold in 2017. Here is a look at some of them:
A recent rise in the global bond yields in the US and relaxed carry trade is reflecting on gold prices. Also, with the new policy initiatives of the US President directed towards higher infrastructure spending and tax cuts will make the dollar stronger. It will also lead to a further correction in prices. As explained previously, gold and currency move inversely, the stronger the dollar becomes, the lower the gold prices will go.
The Indian government imported approximately 30 tonnes of gold (with a worth of around $1 billion) in the seven-day period following demonetisation. The announcement of demonetisation and the two months thereafter were a shock for many investors and witnessed quite a few rumours. Many jewellers started to import gold immediately to replenish their stocks. Also, gold demand in India increased and along with it, the gold prices. However, experts say that the price surge due to demonetisation will be temporary. In addition, after the hints on possible interest rate hikes by the US Federal Bank in December, gold prices are certain to see a fall.
Inflationary US and Chinese Policies:
Plans of the US President to cut taxes will add approximately $7.2 trillion in the federal debt in the first decade, not to mention the $19 trillion already outstanding. Additionally, higher fiscal spending, tight labour market and rising wages will ultimately lead to higher inflation that will affect the dollar and obviously gold.
If we talk about Chinese fiscal policies, current fiscal stimulus and growing housing market have led to huge credit creation in China. The most recent rise in housing prices started in April 2015 when Chinese stock prices registered their peak. A similar peak is being traced out in the current Chinese housing market. This is why Chinese speculators are turning towards commodities to hedge the depreciation in their Chinese Yuan-defined assets. On the Chicago Mercantile Exchange, gold futures turnover has increased about 25% that indicates that the precious metal pricing power is shifting to Chinese hedge funds and traders.
Chinese and Indian Jewellery Demand:
China and India are the world’s two largest jewellery markets and in both the countries, the jewellery consumption was down by 27% and 41% respectively on a year-on-year basis in the third quarter of 2016. This factor also affected the global jewellery demand that makes up half of the annual gold demand. This clear decline in the jewellery demand of both China and India was due to some assemblage of factors that would not reoccur in 2017.
Some of these factors were loss in Chinese consumer confidence, tax hike on Indian gold imports, and the cash crisis in India due to demonetisation. However, both Chinese and Indian consumers are expected to increase their jewellery consumption in 2017 and South Asian gold sales have already started to increase. This will mean a rise in global demand for gold and as a result an increase in gold prices.