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Thursday, November 26, 2020

Explained: Is Diwali the right time to invest in gold?

A fresh spike in global Covid numbers and continuing uncertainty reinforce the case for investing in gold, whose prices are expected to firm up. The investment should be in gold bonds, periodically.

Written by Sandeep Singh , George Mathew | Mumbai, New Delhi | Updated: November 6, 2020 12:46:56 pm
gold, gold investment, gold price, india gold price, buying gold in diwali, diwali investment, indian expressUnless gold is being bought for jewellery consumption, the investment should be through sovereign gold bonds, experts advise. (Express Photo: Pavan Khengre)

On Wednesday, the number of new Covid-19 cases around the world crossed 5 lakh in a day for the first time. The fresh spike in cases and deaths and growing uncertainty about controlling Covid-19 has not only brought equities back under pressure but also reinforced the case for investment in gold. If hopes of a vaccine have now spilled over to the second half of 2021, there is also anxiety over the time it may take to vaccinate the entire world population. While this is ample cause to worry investors, low interest rates and high inflation are other factors that would keep gold prices firm until a vaccine is in sight.

With the Diwali festive season round the corner, many feel the high prices should not come in the way of gold purchase, and one should continue with periodic gold investment as part of asset allocation.

How have gold prices moved?

As the Covid numbers surged sharply over the last week and several European countries announced fresh lockdown measures, gold prices, which had retreated from over $2,050 an ounce in August to $1880 an ounce in October, may witness a fresh spike going forward.

In India, prices are down from levels of over Rs 56,000 per 10 grams in August to around Rs 51,000. On Thursday, gold prices closed at Rs 50,630 per 10 grams in Delhi. In the meantime, the rising Covid numbers and continuing uncertainty have led to volatility and a fall in the stock markets. The BSE Sensex closed at 39,749.85 on Thursday, down from the index value of 40,707 on October 21.

Gold prices started their upward march since May 2019 and have jumped over 50% in a little over a year, from $1,225 an ounce to around $1,880 now. They peaked around $2,080 an ounce on August 7, while the Indian price in market touched Rs 58,000 per 10 grams.

Are they expected to rise further?

If news about a Russian vaccine in August led to a decline in gold prices after they hit a high, prices are expected to firm up on the back of rising cases, fresh lockdown restrictions in several countries and uncertainty around economic recovery and geopolitical developments.

Historically, a rise in uncertainty and fear is the single biggest factor that leads to a jump in prices of gold as central banks increase the pace of their gold purchase. And the US-China trade tensions and the India-China border stand-off only add to the uncertainties. The US Federal Reserve signalling that interest rates will be kept near zero until 2023, too, is expected to keep the dollar index weak and may, in turn, result in keeping gold prices firm.📣 Express Explained is now on Telegram

So, should you invest in gold?

Investors should look to invest in gold keeping in mind that it is a long-term generational asset, which should not be bought for short-term gains. Gold at Rs 50,000 per 10 grams may seem expensive today but may prove to be a worthwhile decision two decades later. Over the last 15 years, it has risen from levels of around Rs 7,000 per 10 grams. While future gains may not be quite what we have seen in the past, investors must invest anywhere between 5-10% of their portfolio in gold.

So, irrespective of Diwali, investors should continue accumulating gold on a periodic basis — monthly or quarterly. One must, however, avoid making a lump-sum investment in gold.

Also in Explained Your MoneyAmid Covid-19, should you dip into Employees’ Provident Fund?

Should you buy coins or bonds?

Unless gold is being bought for jewellery consumption, the investment must be through sovereign gold bonds. While they offer capital appreciation in line with gold price movement, they also offer a fixed 2.5% coupon per year. Since they are issued in the name of the investor in a paper form, it takes care of safety concerns. The bonds have a maturity period of eight years, and investors have the option to exit after the fifth year.

As for taxation, while the interest earned on these gold bonds is added to the holders’ income and taxed at a marginal tax rate, any capital gains on these bonds at maturity is tax-free, making them a far more attractive option than owning physical gold.

Another option is gold exchange traded funds (ETFs) floated by mutual funds. Gold ETFs have given good returns to investors this year. The total assets under gold ETFs now amount to Rs 13,589 crore, as per AMFI data.

In case of coins, making charges can vary between 8% and 15%. While the price of 24-carat 10-gram gold today is around Rs 51,500, the MMTC-PAMP 24 carat 10-gram gold bar was priced at Rs 56,400 (almost 8.8% higher).

Why did gold demand fall in the September quarter?

Demand for gold in India for the quarter ended September 2020 was at 86.6 tonnes, down 30% compared to 123.9 tonnes in the same period last year, The value of the gold demand for the quarter was Rs 39, 510 crore, down 4% from Rs 41,300 crore a year ago.

Total jewellery demand in India for the September quarter decreased by 48% to 52.8 tonnes from 101.6 tonnes last year. However, total investment demand at 33.8 tonnes rose by 52% from 22.3 tonnes in September 2019.

Somasundaram P R, Managing Director, World Gold Council, said: “India’s September quarter gold demand fell by 30% to 86.6 tonnes on the back of Covid-related disruptions, bleak consumer sentiment and high prices accompanied by volatility. This is, however, higher than in Q2 which at 64 tonnes was a 70% drop and the second lowest in our quarterly series. This has been partially due to easing of lockdown and some low prices in August that provided a small window of buying opportunities for the discerning.”

Shouldn’t RBI’s investment in gold boost consumer confidence?

The Reserve Bank of India Act, 1934 provides the legal framework for deployment of reserves in foreign currency assets and gold. As at end-March 2020, the RBI held 653.01 tonnes of gold — 360.71 tonnes overseas with the Bank of England and the Bank for International Settlements, and the remaining gold domestically. In value terms (dollars), the share of gold in the total foreign exchange reserves increased from about 6.14% at end-September 2019 to about 6.40% at end-March 2020. The actual value of the RBI’s gold holdings has increased to $36.685 billion as of October 16, 2020 from $30.578 billion, a rise of over $6 billion in 7 months.

The RBI has deployed the foreign exchange reserves in various avenues like gold, fixed deposits and US treasury bills to minimise capital risk. In fact, most central banks around the world hold huge gold reserves as a strategy to widen their investment basket and minimise risk.

Don’t miss from Explained | The falling Covid-19 numbers in Maharashtra, and why a second wave may be on its way

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