Gold has rallied in 2018 but this comes after a long period of stagnation
Five years of stagnation have scarred gold investors. We give you the factors behind this dark patch and those that will determine its future.
Gold has rallied in 2018 but this comes after a long period of stagnation. It has given us a nearly 5% (absolute, not annualised) return in the past month. However, if you stretch the period back further, the gold price is only about 1% higher than what it was a year ago. Over the past five years, the return is actually -1.7% (annualised).
There are two main reasons why the yellow metal has stagnated. First, global investors seem to be investing in the equity markets. This includes investors in emerging markets such as India. As more money is redirected to the equity market, there is less investment in gold. In fact, global demand for gold touched an eight-year low in November last year. Inflows into gold ETFs the world over also slowed down. Reports by the World Gold Council show that investment demand for gold was down by a whopping 28% during the quarter ended September 2017.
Second, the fall in the rupee price of gold simply reflects the strength of the rupee against the US dollar. The Indian rupee has appreciated by more than 6% against the dollar in the last one year. Gold is a dollar-denominated commodity and hence falls when the rupee strengthens against the dollar because you need to pay fewer rupees for every dollar of gold.
In the coming months, there are some major factors that would decide where gold is headed. One is the US Federal Reserve which sets interest rates in the US and thereby affects global interest rates. If the interest rates in the US are hiked sharply, gold prices could fall further.
Another factor is the level of optimism in world markets. Gold is used as a hedge during tough times. If times are good for the other riskier assets such as stocks, gold will go down further. MorningStar has forecasted that on the back of weak investment demand, gold prices might fall further to $1,150 an ounce by the end of 2018.
However, India is a gold loving nation and remains one of the largest consumers of the yellow metal in the world. Gold demand has been weak in India over the past two years, the latter part being driven by demonetisation. It may be time for a cyclical revival. Gold prices also tend to rise during the festive seasons. Demand from both China and India will most likely ensure that gold prices keep moving up in the long run.
If you want to invest, do it in phases like you would do SIP in equities. This will get you a larger quantity of gold when its price falls. Gold ETFs are a convenient and cheap way of investing in gold as we explain here. If you want to make physical investments, it is best to buy gold coins and bars rather than gold jewellery which will have lower resale value (thanks to wastage and other charges). Before you invest in gold, keep an eye on those prices.