Is gold losing sheen?

But what will impact gold prices for retail customers is the finance ministry’s decision to increase the import duty the metal to 8 per cent,which many analysts believe could lead to as much as a 10 per cent rise in prices at the retail level.

Finance minister P Chidambaram has also asked banks to discourage customers from buying gold and is hopeful that at some point in time gold will be considered just another metal,albeit one which shines a bit more brightly.

But for the Indian consumer as well as investor,gold is a complex issue mired in both age old traditions as well as new age investment philosophies. While on the one hand,the recent spike in gold demand is blamed for the burgeoning current account deficit – which is the main cause for fuelling such stringent measures by the government,traditionally gold is considered auspicious and is bought for weddings and special occasions as well as festivals such as Akshaya Tritiya and Dhanteras. Not surprisingly then,India is the world’s largest consumer of gold.

The question then is that in view of the latest round of government measures has gold lost its sheen?

EXPERT VIEW

There is no doubt that just as retailers often join a market rally in the last leg and book losses,the gold rally too had run its course.

Experts are clear that from here the gains seen in the past two years will not occur soon. Which means consumers purchasing it as a hedge in the past two months (and that quantity is considerable at 152 tonnes in April) have begun to suffer losses. If the price does not increase more than 10 per cent annually,they will lose vis-à-vis financial deposits from here.

So banks which till recently been selling gold coins as well as gold bars to customers as an investment option that would cash in on the rising prices of the metal would have seen a dip in interest,possibly even without the instructions. Most banks The Indian Express contacted did not wish to come on record on the issue in but said,they would follow the directives given by the finance ministry.

Analysts and mutual funds believe there is still some rally left in gold but warn that this can only be capitalised upon if one follows restraints.

“The import duty has gone up to 8 per cent now but investors need to see it also from the point of view that rupee is depreciating against dollar and since gold is a global commodity,it could fetch them returns also on account of depreciating rupee,” said Ritesh Jain,chief investment officer,Tata Mutual Fund.

Rajini Panicker,head of commodities research at Phillip Capital agreed and said that gold has lost its momentum. “The import duty has gone up but with rupee depreciating and the availability getting difficult going forward,there may be an upside to gold,” she said. While gold is expected to generate negative return this year and even next year,it is going to remain weak for four to five years,she said,adding that it can be an option for the long term investment.

“If someone wants to take the long-term call for 10-15 years,he can invest into gold. No one should look to get into gold with expectations of quick returns that they had in the past,” she said.

PRICE FLUCTUATIONS

Apart from the government measures,the volatility in gold prices too has raised questions about the metal. The fall in gold prices over the past few months has been a rare phenomenon as over the last eight to 10 years,prices of the metal have been on the rise.

While in the domestic market,gold prices,which touched a high of Rs 32,460 per 10 gram in November last year are now hovering around Rs 27,800 per 10 gram after dropping to Rs 26,000 levels in the middle of April.

In the international markets too,gold prices have seen similar volatility and fallen to levels below $1,400 per an ounce. But some investors as well as retail buyers have viewed the drop in gold prices as an opportunity to buy more.

The World Gold Council,which is the premier organisation that works to promote the metal,in its latest research carried out in May 2013 found that 82 per cent of consumers in India and China believe that over the next five years the price of gold will increase,or be stable. The council also expects a 150 per cent year-on-year rise in gold demand in the second quarter of 2013,suggesting that India may import as much as 400 tonnes of gold.

“This report leads us to conclude that Asian markets will see record quarterly totals of gold demand in Q2 2013. Even if exchange-traded fund (ETF) outflows continue in the US,it is quite likely that the gold previously held in ETFs will find a ready market among Indian,Chinese and Middle Eastern consumers who are taking a long-term view on the prospects for gold,” said Marcus Grubb,managing director,investment at the World Gold Council.

ALTERNATE INVESTMENT OPTIONS

Experts believe that gold can continue to be a part of an investor’s overall investment portfolio but should not be the only constituent. Pointing out that while the government is doing everything it can to curb gold purchase,Jain said investors should always invest in gold as an asset class and have 10-20 per cent exposure of their total portfolio depending upon their profile.

However,since gold is being seen as a hedge against price rise,returns on fixed deposits or small savings schemes that yield about 8-10 per cent at most are not seen by investors as a comparative option.

To address this anomaly,the government has now launched inflation indexed bonds. Launched earlier this month,an interest rate of 1.4 per cent on these bonds with a 10 year maturity was set for institutional investors. They are expected to be launched for retail investors soon.

On the anvil are also inflation-indexed national savings certificates as well. And the finance ministry has indicated that it could launch similarly innovative products that would give protection from inflation as well.