Should investors buy gold this Dhanteras?

By Navneet Damani

It’s festive season around and the question once again on everybody’s mind is, what do we buy this Dhanteras and Diwali?

And the most common answer often is gold or silver. But is it really the right time to invest in precious metals? We say yes!

With the ongoing rally in the domestic equity market, which is close to its all-time high level and growth in the economy returning, will gold still be a good investment avenue?

Over the long term, investing some part of savings in gold always fetches good returns. At the same time, it creates protection against erosion of purchasing power either to the exchange rate or inflation.

Gold delivered 15 per cent returns CAGR over the past 15 years and after negative returns for three consecutive years, gold has given positive returns this year, adding to the excitement of investors.

This year’s Diwali seems to be one of the best for jewellers in many years. The mood on the Street has been buoyant after gold rallied by more than 20 per cent over the past one year with a price correction happening just before the festive season.

The festive season saw good footfalls at jewellery showrooms and jewellers are also offering various schemes to boost sales. So, after a couple of dull seasons, we expect this festive season to be better in terms of sales.

The global economy is going through a peculiar phase of anaemic growth and much of the developed world is sinking into the negative interest rate territory. As such, gold would certainly be one of the preferred asset classes for investors.

The only risk factor maybe a rise in US interest rates, but we have seen central banks often tend to fall behind the curve rather precede it.

We believe even in the case of the US Fed, the recent rise in wages shows that inflation is going to rise faster if growth picks up from here on. The US Fed is in two minds in view of the weakness in Europe and possible impact of Brexit. Hence, the rates may not rise as sharply as inflation can, which in turn is can be a big positive for gold.

We still believe that while the larger bullish trend is intact, gold could see intermittent price corrections and an extended period of consolidation before we get any meaningful trigger for a fresh rally.

In the short term, there are no major triggers and gold could be vulnerable to volatility.

But our optimism stems from the fact that the US Fed has projected less aggressive rate hikes in 2017 and the Fed’s ability to hike will be contingent on the outcome of the US elections.

Given the uncertainty over US election outcome and other global factors, we believe gold will emerge better once the excess speculative froth is out of the market.

For the short to medium term, any choppiness would provide an opportunity for long-term investors to capitalise on the fall.

Like gold, silver is also sensitive to US monetary policy changes and revival of rate hike expectations over the past few weeks has stemmed the price rally. Silver has been a prime beneficiary of institutional investment demand this year and investment inflows in global silver ETFs have surpassed 1950 tonnes so far in 2016.

While gold ETF holdings flattened over the past two months, silver ETFs continued to see robust inflows despite price volatility with holdings up more than 900 tonnes in last three months alone.

Prices may, however, remain vulnerable to dollar strength in the near term given that speculative longs have remained elevated and investment flows have shown signs of slowing amid weakness in price.

In industrial metals, silver closely tracks moves in copper which has been among the weakest in the industrial metals space as Chinese growth figures are not encouraging enough to bet on any pickup in demand.

We believe silver will broadly follow the gold price trajectory but could underperform relative to yellow metal as the silver market is forecast to record a growing fundamental surplus over 2016-17.

We believe the larger bullish trend is intact but silver could see intermittent price corrections before we get any meaningful triggers for a fresh rally.

(The author is AVP- Research at Motilal Oswal Commodity Brokers. Views and recommendations given in this writeup are his own and do not represent those of ETMarkets.com. Please consult your financial adviser before taking any position in the stock/s mentioned.)