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Why you should stay away from gold for a while

By Rajesh Bhayani and Sachin Mampatta
January 05, 2015 11:05 IST
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Forecasts suggest subdued price and demand outlook; bank FDs and other assets are giving better returns

Gold

Image: Gold ornaments on display at a jewellery store. Photograph: Reuters

Prime Minister Narendra Modi’s advice for banks to convince people to channelise savings from gold to fixed deposits is endorsed by many personal finance managers.

In the past two years, investors in gold have lost money.

In most other asset classes, 2014 has been a year of positive return and perhaps a positive real rate of return after adjusting for inflation.

In 2014, gold lost 7.3 per cent in value as the price closed lower; in 2013, it lost 4.1 per cent.

Considering the inflationary impact, investors in gold lost 14.7 per cent in 2014, while all other asset classes, such as equities, bonds and bank FDs, gave positive real returns in 2014.

Gold jewellery

Image: A jewellery showroom. Photograph: Jayanta Dey/Reuters

In other words, gold has failed as a hedge against inflation, at least in the past two years in India.

In 2014, after equities, bank deposits gave a real return of 1.6 per cent, after adjusting for inflation, and government bonds 1.4 per cent.

Data show bank FDs have emerged the best bets for investment in financial instruments and as the PM said, “The challenge for banks is to convince investors that bank is as safe and reliable as they perceive about gold.”

For investors who can chose other debt instruments, Lakshmi Iyer, chief investment officer (debt) & head, products, at Kotak MF, has an advice.

She says: “If the US were to hike interest rates, which could happen in the latter part of 2015, investors should prepare for muted returns from gold.

Gold bars

Image: A machine engraves information on an ingot 99.99 per cent pure gold. Photograph: Ilya Naymushin/Reuters

"The euphoric returns after the financial crises are now unlikely and gold could well see a correction of around $200 (an ounce) from current levels.

"On the fixed income side, we expect to see an interest rate cut of 50-100 basis points in 2015. Duration funds and accrual funds would be a good way to play the scenario.

"The former could give 12-15 per cent, and the latter of 10-11 per cent if the interest rate cut happens as expected.”

The accrual strategy bets on high interest payments, while duration funds look to profit from capital gains.

Duration funds provide capital gains in a declining interest rate scenario because bond prices increase as interest rates decline

For those who still want to consider gold for its age-old proven characteristics, such as a store of value, GFMS Thomson Reuters sees gold remaining subdued in 2015.

Gold bars are stacked in the safe deposit boxes room of the Pro Aurum gold house in Munich.

Image: Gold bars are stacked in the safe deposit boxes room of the Pro Aurum gold house in Munich. Photograph: Michael Dalder/Reuters

Says a GFMS Thomson Reuters analyst, “Anticipating a third straight year of decline for the average annual gold price, with a modestly reduced forecast of $1,150/oz (down from $1,175/oz), equating to a 9.2 per cent decline from a mark to market 2014 price of $1,266/oz.”

The principal drivers for the continued weakness remain the same -- a stronger dollar and a greater perceived risk to reward ratio from other asset classes in a low inflationary environment.

The price levels are average and, hence, could fall lower than the average price.

Consumers in India will wait till duty is cut, as prices are less likely to go up for long, by various forecasts.

To support the forecasts, projections for gold demand are also muted.

A sales assistant puts back a gold Buddha-shaped pendant after showing to a customer at Caibai Ornaments store in Beijing. Photograph: Petar Kujundzic/Reuters

Image: A sales assistant puts back a gold Buddha-shaped pendant after showing to a customer at Caibai Ornaments store in Beijing. Photograph: Petar Kujundzic/Reuters

GFMS said, “Overall, we expect a 12 per cent recovery in jewellery demand in 2015, bringing total offtake to 2,455 tonnes (globally) -- its highest level since 2005, when the price averaged only $445 an ounce.

However, much of the 270-tonne increase in jewellery demand forecast in 2015 is expected to be offset by lower bar and coin (retail investment) sales.”

The message is clear.

Look for other asset classes, as gold is forecast to remain dull for some time.

NOT GLITTERING

  • In 2014, gold lost 7.3%
  • Investors in gold lost 14.7%, after considering inflationary impact, in 2014
  • Bank deposits gave a real return of 1.6%, after adjusting for inflation
  • Government bonds gave a return of 1.4%

Experts’ expectations

  • Euphoric returns are now unlikely and gold could see a correction of around $200 (an ounce) from current levels
  • Interest rate might cut 50-100 basis points in 2015
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Rajesh Bhayani and Sachin Mampatta in Mumbai
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