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Don't get into this gold rush

Last updated on: July 20, 2011 11:24 IST

Don't get into this gold rush

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Neha Pandey in Mumbai

The sharpest spike in four decades is likely to have a limited upside.

The yellow metal is back in focus.

And, crisis in the Euro zone and fears of US default are only adding to the number of investors in gold.

Financial experts, however, say it isn't the right time to enter the metal. But if you are already in, stay invested.

There could even be an opportunity to book profits after there is clarity on whether US is going to raise rates or reduce them.

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Image: Conservators apply gold leaf to the Golden Victoria monument in Berlin.
Photographs: Thomas Peter/Reuters
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"Gold is expected to touch the $1,600 an ounce in a few days. In fact, it could touch $1,700 per ounce this year," said Kavita Chacko, AVP, Commodities Research, Angel Broking.

On Friday, the yellow metal gained on the tenth straight day, when it touched a record high of $1,598 an ounce, the longest winning stretch in four decades.

Besides the debt crisis internationally, other factors supporting this gold price rally are rising crude oil price, US consumer confidence falling to a two-and-a-half year low this month and manufacturing output stalled in June.

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Image: Italian gold flatware.

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Experts expect more clarity on US and Euro zone problems in a week's time, which if positive, could soften gold prices or strengthen the rally further on negative news.

Kishore Narne, head (commodities research), Anand Rathi Financial Services, says investors should book profits when the US Federal Reserve raises interest rates.

"That will be the medium-term peak for gold prices. But, till then, keep holding on your investments," he says.

For investors in gold, it has been a lucrative decade, and an even more rewarding two-and-a half years.

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Image: A jewellery store.

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In the last 10 years, gold has returned over 19 per cent.

Since November 2008, when gold prices started rising (from $712.30), this asset class has given back 43 per cent (compounded annual growth rate).

Other assets classes have done well over time.

But have faltered in the last few years.

The Sensex has returned close to 30 per cent for ten years.

But over five and three years, it has given annualised returns 11 and 13.56 per cent, respectively.

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Silver has returned 18 per cent in 10 years, similar to gold. But in the last three years, it has returned 11 per cent annually.

Some sector funds may have performed well but they are much riskier proposition.

"Silver is a high-beta metal. It can fall as easily as it moves up.

"Plus, silver is still around 20 per cent below its all-time high of Rs 50,000 per ounce. For retail investors, gold is a better bet than silver," says Viral Shah, senior VP, Geojit Commtrade.

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But, there is a risk with gold from here on.

Even the support levels are not too clear because of the extraordinary circumstances that are driving its demand.

"With silver, we know Rs 50,000 is the support level. But with gold, it is difficult to predict anything at this point," adds Shah.

If you are among those who missed this rally, you can buy the yellow metal but the returns would not be as attractive as it has been for the past few years.

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"You will not see your investments double from here soon. In fact, 15-20 per cent returns are expected," cautions Narne.

Any positive news on the international front could see gold correct easily by up to 15 per cent, providing an entry to retail investors.

But as financial planners say, one needs to treat gold as just a part of portfolio and not go overboard.



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