• HDFC securities
• 09 Apr 2018
• Knowledge Centre

The importance of gold in India cannot be underestimated. The yellow metal has played and will continue to play a vital role in our country in a host of ways, and for multitude reasons.

 

Gold is a very popular commodity in the country. Its use in the making of jewelry and religious idols lends both emotional and religious value to the metal and helps in keeping demand high. It is also viewed as a hedge against inflation, an aspect which adds to its role as an investment option.

 

The trajectory of the price of gold in India can be traced back to a prolonged rally starting from end-2002 to end-2011. However, this upswing was not sustainable, and gold prices witnessed a decline thereafter.

 

Current Scenario:

 

The current scenario is also not very inspiring. The demand for gold in 2018 is likely to stay below its 10-year average for a third year, according to the World Gold Council. However, this demand arises not just for consumption purposes, but also as a reserve currency and hedge against uncertainty, all of which are difficult to forecast.

 

Global gold prices have risen 8% since mid-December 2017. Lately, the price of gold was range-bound post the Fed Reserve meeting, as the metal’s price had already factored in three interest rate hikes.

 

Overall, gold prices are affected by a number of factors. Some of these are:

 

• Prevailing interest rates,
• Inflation,
• The US dollar rate (weakening of US dollar is usually accompanied by a spurt in gold prices), 
• Stability of the central bank, 
• Supply and demand parameters, 
• Quantitative easing, 
• Government reserves, 
• The health of the jewelry industry and
• Overall annual production.

 

“As an asset allocation measure and an inflation hedge, 5-15% of your assets could be invested in gold (preferably through the SGB or ETF route). However, don’t expect returns every year from this investment, and it may be meaningless to compare returns from this with those from equity or debt on a year-on-year basis. A longer period for comparison of 15-20 years may be more appropriate,” said Mr. Deepak Jasani, Head Retail Research, HDFC Securities Ltd.

 

India is the world’s second-largest consumer of gold. A snapshot of triggers – both negative and positive – that have affected the price of the metal in the recent past include:

 

• The jewelers’ strike to protest against the Government’s rule of making PAN card proof mandatory for gold purchases of Rs 2 lakh and above, 
• The Brexit vote, 
• Festive and wedding seasons, 
• Trump’s win in the U.S Presidential elections and 
• PM Modi’s demonetization scheme, 
• The imposition of higher Goods and Services Tax on bullion purchases (1.2% to 3%) in 2017 has also hampered prices.

 

There are other methods by which an investor can buy gold. India's first Gold Exchange-Traded Fund (ETF) was launched on 15th February 2007. This was followed by the Government of India launching Sovereign Gold Bonds (SGB) in October-2015. In addition to this, an increase in spending power in India and China is expected to help buoy the price of the yellow metal.

 

Given the global uncertainty on the geopolitical, trade and monetary policies’ front, Gold may be in the reckoning soon. According to Mr. Jasani, “Gold as a commodity has proved to be an effective hedge in uncertain times, economic slowdowns or recessions. If we consider the 110-year history of gold prices (1900-2010), we observe that prices increase rapidly in a short period of time, and they tend to remain flat for a long period of time. Gold prices internationally have not gone anywhere over the last seven to eight years. Has the time come for outperformance by gold over the next few years? ”