Gold is the investment asset class which provides a hedge against inflation and better returns during recession when currencies lose their value drastically. The world is now coming out of tough times and major economies like the US have started showing good economic numbers which are fundamentally bearish for gold.
Against this backdrop gold may not give better return than equities in coming 1-2 years.
Nevertheless, from a long-term perspective bet 5-10 years investors will definitely get positive returns not less than inflation rate.
In an interview with Ajeet Kumar of Zeebiz.com, Rajiv Kapoor, Head Commodities, Trustline shares his views on gold price trend, outlook and investment.
Will current downtrend be sustainable?
Absolutely, we are into a major downtrend as a string of robust US economic numbers is a clear indication that the US economy is back on a growth track , hence the Fed decided to shrink the US stimulus package to the tune of USD 10 billion from USD 85 billion to USD 75 billion.Therefore, most of the big international investors as well as ETF holders are migrating there investments from bullions to riskier assets like equities as the yellow metal is losing not only its safe haven appeal but also as an instrument to hedge against inflation as inflation in US is been stagnant for long time.
Will supply crunch add more premiums to gold in the domestic market? How it is affecting gold prices domestically and internationally?
Supply crunch in the Indian market is due to stringent import norms that have brought down Indian gold imports, increased premiums in India. Gold prices domestically hold around Rs 28000-Rs 29000, Rs 1500-Rs 2000 above than international prices. This is having a bearish impact on international prices as India was a largest hold importing country prior to import sanctions by government.
If govt eases import norms in the near term, how will it impact gold prices?
Easing of import norms will remove the premium which is currently ruling around Rs 1500-2000.
What is your outlook for gold prices in the near to medium term?
The outlook for gold prices is subdued in both markets domestic as well as international.
Is current sell-off a sign of commencement of a multi-year bear market?
I do not think so since we have already seen a major part of the sell-off. If you see, COMEX prices were peaked out around USD 1920 in the last quarter of 2011 and now it is trading around USD 1200, hence it has corrected roughly 35 percent from the top. Though same reflection has not been seen in Indian commodity market, courtesy weak Indian Rupee against US Dollar. The Indian government`s policies to hike import duty from 2 to 10 percent in order to curb gold import, tightening import policies and efforst to reduce a ballooning CAD created shortage of physical gold which raised the premium in MCX over COMEX.
Will gold prices below the level of USD 1,000 per ounce sustain?
I do not think gold price will sustain below USD 1000 as mining and production cost is currently around USD 1100.
Could you discuss some of the long-term reasons why it’s still a good idea to invest in gold now?
See, gold is the investment asset class which provides hedge against inflation and better return during recession when currencies lose their value drastically. he world is now coming out of tough times and major economies like the US have started showing good economic numbers which are fundamentally bearish for gold. Therefore, I think gold may not give better return than equities in coming 1-2 years. Nevertheless, from a long-term perspective, say in 5-10 years, investors will definitely get positive returns not less than the rate of inflation.
Is a deeper retracement or a rebound ahead for the yellow metal?
Internationally, prices have already retraced, 35 percent, most part of the bull run. Domestically, we might see a dip towards 26K to 27K once government relaxes Gold import norms.
Has outlook for gold been dashed by its recent weakness?
Gold outlook is not much encouraging at least for year 2014 from current market prices of Rs 28,500 since we are expecting it to move between Rs 26K to Rs 32K. If investments are done around Rs 26K-Rs 27K, this might provide an exit roughly around Rs 30K-Rs 31K.
In your view, what are the three biggest downside risks to gold right now?
Low inflation in major global economies, scaling down of US stimulus package, strong global economic numbers and rising equity markets.
What are the three major upside triggers to gold right now?
If current string of robust economic numbers started withering, equities start weakening and if any kind of sudden geo-political tension erupts between in oil producing nations will boost oil prices.
Is it the right time to invest in gold?
Not yet, 10-15% correction is still expected.
Now, what`s the best way to invest in gold? physical buying/gold savings fund/ETFs/futures/others?
I believe for investment purposes Gold Saving funds and ETFs will be the best way.
What range do you expect gold to trade by the end of 2014?
I`m expecting gold prices to trade in a range between Rs 26500-Rs 32000 on MCX and USD 1100 to USD 1300 in international market.