Indians are gold crazy. Brides and deities in temple are covered by this royal metal. Our country has always been a large importer of gold. Here, gold is an emotion rather than just a commodity. Season of festivals and weddings keeps the gold buying thought live in everyone’s mind. Apart from physical gold, there are several other options like gold ETFs, Sovereign gold bonds when it comes to investing in this yellow metal. But, the biggest question is why should you invest in gold market? Or is it still a wise choice of investment in this modern economic environment? Well, there is always a split opinion to such questions with a convincing argument. Here’s why we say it’s not the right time for investing in gold!

Growth sparkle in Global Economy: Gold is a favourite asset class for most of the investors in times of inflation and economic crisis. Gold started off well this year; investors started investing in “safe haven” assets as market trembled in the beginning of the year. Historically, economy’s bad health like lower interest rates, negative stock market shocks, weakening of US dollar etc have been the major reasons for boost in gold market. This year June, gold prices soared to two-year high after the “Brexit decision”. Britain’s decision to leave the European Union has made the yellow metal more appealing as a store of value. However, dollar rate is marching higher after Donald Trump’s victory in US presidential election. Gold prices are already falling and continue to slum as dollar is soaring after the comments from US fed about raising the interest rate next month. Gradual growth in economy is expected in days to come as currency is strengthening. This could be a biggest negative for gold market!

Continuous fall in Demand: If we go by statistics, demand for gold in India fell by 28% in the third quarter this year in comparison with Q3 last year. As per World Gold Council’s report, there is continuous downfall in overall demand for yellow mental across the globe. Gold seems to be less appealing to the people across globe!

Data highlights for Q3’16 demand
Q3’15 Q3’16 5-year average Year-on-year change
Gold demand 1,104.8 992.8 1,120.5 -10
Jewellery 621.6 493.1 580.1 -21
Technology 82.8 82.4 88.9 -1
Investment 232.4 335.7 311.4 44
Total bar and coin 295.8 190.1 316.8 -36
ETFs and similar products -63.4 145.6 -5.4
Central banks & other inst. 168.0 81.7 140.1 -51
Consumer demand in selected markets
India 271.2 194.8 64.3 -28
China 233.8 182.5 -3.4 -22
Middle East 68.1 44.0 -6.8 -35
United States 57.3 43.6 -10.0 -24
Europe ex CIS 72.9 50.3 -8.9 -31


Not-so-impressive Performance History : Gold returns have turned positive this year after the negative returns for last three calendar years. Below is the data presented by World Gold Council comparing gold with other assets :

Performance on various assets in INR (data ending 31 Oct 2016)
Gold (INR/oz) Gold (US$/oz) MSCI FX Rates India S&P GSCI BBG Comdty Index Brent crude oil (INR/bbl) INR 3-month deposit JPM GBI India JPM EMBI Global MSCI India BSE SENSEX 30 spot MSCI EM
1-month -3.6% -3.4% -0.1% -1.2% -0.3% -2.4% 0.6% 0.9% -1.5% 0.6% 0.4% -0.8%
3-month -5.4% -5.1% -0.3% 4.4% 0.8% 13.8% 1.8% 3.6% 0.6% -0.2% -0.4% 4.1%
YTD 21.2% 20.1% 1.0% 4.6% 9.3% 31.7% 6.3% 13.1% 14.3% 7.5% 6.9% 17.6%
1-year 13.4% 10.8% 2.4% -11.0% 0.3% 2.5% 7.6% 13.6% 14.1% 5.6% 4.1% 12.4%
3-year 4.5% -3.9% 8.7% -49.1% -26.5% -53.7% 28.1% 42.7% 28.6% 33.7% 32.0% 2.6%
5-year 1.4% -26.1% 37.2% -37.2% -21.7% -41.5% 54.6% 68.5% 85.0% 62.8% 57.8% 43.5%
3y CAGR 1.5% -1.3% 2.8% -20.1% -9.8% -22.6% 8.6% 12.6% 8.7% 10.2% 9.7% 0.9%
5y CAGR 0.3% -5.9% 6.5% -8.9% -4.8% -10.2% 9.1% 11.0% 13.1% 10.2% 9.5% 7.5%

Gold returns based on the LBMA Gold Price.

Calculations based on total return indices when applicable.

CAGR = compounded annual growth rate (i.e., the geometric average rate of return over the corresponding period).

Source: Barclays Capital, Bloomberg, ICE Benchmark Administration Ltd, MSCI, World Gold Council


Gold is just a Hedge against Inflation: Unlike shares and bonds, gold does not provide any periodic income flow. It’s worth only what someone will pay you for it. There is no metrics that exists for valuation of gold.  Its value is derived from demand and supply and consumer sentiment. As it’s a physical asset, there is cost attached to holding this precious metal and also to insure it. Hence, gold is not an ideal choice of investment in the times of growing economy

To sum it up, with the government restrictions in terms of import duty and economy growing stronger, gold seems to remain out of favour for investors!


Author: Rupanjali Mitra Basu

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