Is this a good time to buy gold?

Gold prices in India are now down over 20% from their peak over a year ago, while globally prices are down nearly 40% in three years. Should you consider buying gold now? Global investors are not buying, and instead have been consistent sellers as they don’t see returns, need for safety by parking money in gold, nor do they feel that gold is good hedge against inflation as falling crude oil prices and overall bearish commodities seem to have given them comfort investors on the inflation front.

Most analysts also project further fall in gold price because globally gold price is denominated in the US dollar which is strengthening. Forecasts say gold could fall to at a level of $1100 and even below.

Natixis Commodities research said “With favourable conditions for an appreciating dollar, and given the strong correlation between gold and the dollar, we would not be surprised if the price of gold dropped below $1,100/ounce during the first half of 2015.” 

For Indian investors, however, gold does provide protection from imported inflation as in case of weaker rupee against the dollar, gold will become costlier and protect prices from falling. Also when you buy gold in India what you are really doing is buying a US dollar asset as gold is priced in US dollar. In the long term, gold has historically provided protection from inflation.

In view of the lower price and factors favouring gold, if you are tempted to buy gold now, than you have to keep in mind the purpose for which you want to buy. If it is for use, may be today or a year later for marriage etc, perhaps this may be time to accumulate with purchase advisable at every fall. However for investments, globally, investors are consistently selling gold. Holdings in the largest US gold ETF has fallen by 45% from its peak two years ago.

Price projections given by large investment bankers also don’t rule out further fall in gold prices. Indian investors should, however, keep in mind some risks which could swing either side. The first is exchange rate movement. If the rupee doesn’t weaken, than gold prices in India will also fall in line with global trends. During last 40 years, it has seldom given negative returns which was not the case globally for gold. 

Another risk could be possible import duty cut as 10% custom duty on import of gold at present is incentivising gold smuggling because of which the industry has been asking for lower duty. If duty is cut by 2%, gold prices will fall to that extent. Although how and when this will happen is an issue. 

With several restrictions on import of gold over last one year, gold has been quoted at a premium for physical delivery, which was around 8-9% a year ago and is currently around 2%. High premium, which is a result of lower supply, could support prices.

Possible duty cut, high premiums and fall in exchange rate of rupee would not let price of gold fall freely in India. Even globally also, as Natixis puts it, mines output growth has been slowing which will eventually restrict supply. In such a scenario, investors need not be in a hurry to buy gold and future purchases should be gradual.

Sudheesh Nambiath, Senior Analyst (Precious Metals), GFMS, Thomson Reuters said “We expect in rupee terms gold could drift towards Rs 25,000 per 10 gram and investors can start accumulating gradually between Rs 25,500 to Rs 25,000.”

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