Ajeet Kumar/Reema Sharma
Investment in gold has always been a win-win situation. In times of inflation gold acts as a hedge and in times of recession, gold proves to be a safe haven investment.
But due to the freefall in gold prices over the last few days the scene has completely changed. The plunge in bullion market has shaken the confidence in gold—something that had not happened in the last 12 years. Though many analysts had predicted a mild price correction, no market pundit could predict such a massive fall.
The continuous downturn has sent gold at a 20-month low in the domestic market. In the international market, gold saw its sharpest single day decline since 1980 earlier this week. In Singapore, gold had touched USD 1,321.95 on April 16, the lowest level since January 2011.
After dropping Rs 3,160 in the last three sessions, gold on Wednesday fell further by Rs 90 to Rs 26,350 per ten grams, its lowest level since August 17, 2011. On MCX, it is now hovering at around Rs 25,500.
At the current level what should the aam admi do? Should he invest in gold now or should he wait further? Should he invest in gold jewellery or gold coin or ETF? Many such questions are cropping up in the mind of the common man. Let’s have a look at the options and the impact.
If you have invested in gold (ETF, coin or jewellery, gold futures) there is no need to panic. Unless there is an emergency, it is not advisable to sell gold at this point. The fall in the price of gold is merely a price correction. Although a further drop in prices cannot be ruled out, the sellers can be sure that gold will hold good returns in the long term. The price correction may stay for six months or a year after which it will again move northward. So, the seller can sit and wait for the right time and opportunity.
This is certainly the best time for traditional buyers (for wedding purpose and gift purpose). Though it is advisable to wait a little more and watch the price of gold (which is expected to dip further), nonetheless instant investment won’t be disappointing either. You can opt for gold at the current level. Traditional buyers can invest 30-40 percent of their total budget in buying gold at the current level and release an additional chunk after further price correction. However, serious investors and first time investors can err on the side of caution. In the coming one or two years, gold will not witness any major rally. So, investment in other financial instruments like equity, mutual funds and debt can be thought of as an alternative. Conversely, it is advisable to have one tenth of gold in your total portfolio both for the first time investors as well as the seasoned ones.
The correction in price of gold will also affect the third category of persons who neither intend to buy or sell. Correction in the price of gold will indeed reduce the burden on current account deficit which has been a major concern for the government. A lower current account deficit will help the government to go forward with its welfare schemes, infrastructure development and flagship programmes aimed at benefitting the common man.