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Should investors still believe in gold?

Last updated on: May 29, 2013 10:27 IST

Should investors still believe in gold?

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Clifford Alvares in Mumbai

Gold has dulled a lot lately but investors could still take a shine to it, say experts. Since the start of the year, its price has plunged 16.8 per cent (in dollar terms).

Institutional and hedge fund investors sold their holdings for opportune trades in other asset classes or in Japanese markets, even as US Fed Chairman Ben Bernanke hinted at cutting back quantitative easing while the dollar rose against major global currencies.

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Image: Gold turtles are displayed at a jewellery shop in Seoul, South Korea.
Photographs: Jo Yong-Hak/Reuters

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Global institutional investors were pulling out and investing in other financial assets. All this led to a large sell-off in gold and it dipped 13 per cent (in rupee terms) as the rupee was weaker.

Ajay Bagga, head, private wealth management, Deutsche Bank India, said: "The speculative element has got knocked out of gold as some of the long positions have come off."

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Image: A woman looks at jewellery in a gold shop in Abu Dhabi, United Arab Emirates.
Photographs: Ben Job/Reuters

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Trend watchers pressed further sales as key market levels were breached, aggravating gold's fall.

Chirag Mehta, fund manager, commodities, Quantum AMC, said: "Gold dipped as hedge funds sold some of their holdings to chase relative opportunities. The sell-off triggered some key technical levels and aggravated the fall."

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Image: People talk to salesmen as they buy gold at a shop in Bangkok's Chinatown in Thailand.
Photographs: Damir Sagolj/Reuters

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Similar trends were seen in India as local investors redeemed gold worth nearly Rs 77 crore (Rs 770 million) and Rs 123 crore (Rs 1.23 billion), respectively, in March and April.

Coupled with the price fall, gold exchange traded fund assets under management in India dipped 11 per cent since the beginning of this year, to Rs 10,629 crore (Rs 106.29 billion). Retail investors stepped up sales in May.

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Image: A salesman arranges jewellery at a shop at the gold souk in Dubai, United Arab Emirates.
Photographs: Jumana El Heloueh/Reuters
Tags: India

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However, that shouldn't deter investment in gold, as the precious metal has not completely lost its sheen.

Gold has been a traditional safe haven against inflation; lately, too, against the massive printing of money worldwide and the debasement of currencies.

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Image: A saleswoman arranges a gold necklace inside a jewellery showroom in Kochi.
Photographs: Sivaram V/Reuters
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Bagga said: "The currency story is an unfinished one. There's going to be debasement, as there's an undeclared currency war to depreciate currencies and boost exports across the globe."

This would still mean that demand for gold from safe-haven investors against massive depreciation in the currency will happen over the longer term.

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Image: An employee arranges gold jewellery in the counter of a shop in Wuhan, Hubei province, China.
Photographs: Stringer/Reuters
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Nevertheless, Bagga feels other financial assets such as debt are a better investment than gold at the moment. He, therefore, recommends that investors bring down their gold holding from 5-10 per cent to two to four per cent of their portfolios.

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Image: Gold jewellery is pictured on a stand at the Valenza international jewels exposition in Valenza, northern Italy.
Photographs: Alessandro Garofalo/Reuters
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According to the World Gold Council, physical demand for gold from India and China was 345 million tonnes (mt) in the first quarter of this calendar year.

Investment demand has, however, taken a beating, with gold ETFs selling 177 mt in the same quarter.

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Image: Gold jewellery is pictured on a stand at the Valenza international jewels exposition in Valenza, northern Italy.
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Lakshmi Iyer, head, fixed income and products, Kotak Mutual Fund, said: "Demand for gold is still high in India and at lower levels, a lot of people are coming ahead and buying gold. Gold can still be a part of your asset allocation."

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Image: A goldsmith holds up jewellery in Amman, Jordan.
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However, with interest moving on to other financial assets where returns are more obvious, gold exposure can be scaled down.

Mehta said: "One must not make all gold investments at once but stagger investments as and when the price falls."


Image: Gold bangles are on display at the international Istanbul jewellery fair in Turkey.
Photographs: Murad Sezer/Reuters
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