RBI buys gold for the first time in 9 years; a signal to investors?The Reserve Bank of India (RBI) has bought gold for the first time in nine years, the annual report of the central bank has revealed. The RBI bought 8.46 tonnes of gold in the year ending on June 30th taking its stockpile up to 566.23 metric tonnes. The purchase by India’s central bank may be a powerful signal to investors, that gold has become undervalued.

The five year return on Gold BeES, a popular Indian Gold ETF (Exchange Traded Fund) which tracks the price of gold is a miniscule 0.24%. This is even lower than savings bank interest rates. The ten year return is much higher at 8.97%. However the price of gold peaked in 2011 and has been on a downward slope since then.

As we write here, the World Gold Council released a report in August 2018 stating that demand for gold in the first half of 2018 is the lowest since 2009. Demand in the first half was 1959.9 tonne, down from 2086.5 tonne in the first half of 2017. The biggest dip was in investment demand for the precious metal with ETF demand falling 46%.

However, the dip may well be a cyclical downturn in an otherwise healthy asset. Longer-term returns of gold are robust. You can note this from the chart below.

Year Gold Price (INR) per 10 gm Return
1968 162
1968 – 1978 685 15.5%
1978 – 1988 3130 16.4%
1988 – 1998 4045 2.6%
1998 – 2008 12500 11.9%
2008 – 2018 31000 9.5%
50-year average annual return 11.2%

Source: Bankbazaar.com; Data as on 19th Jan 2018

Gold also remains a good hedge against inflation and against rupee depreciation. This is because the precious metal is a commodity and rises automatically with every fall in the rupee.

Should you buy?

It is hard to call the bottom on a commodity as complex as gold. However, it is useful to have a small allocation to it in the portfolio regardless of market circumstances, for diversification. You can buy gold in various ways including gold ETFs, gold funds, physical gold and sovereign gold bonds. Sovereign gold bonds not only track the price of gold but also pay interest of 2.5% thus offering perhaps the most efficient way to buy gold. They have a tenure of eight years, but you can exit after five years.

Author
Staff Writer

This article is written by RupeeIQ editorial staff.