Gold Investment is not so common in India. Now you must be wondering we Indians hoard so much gold then why i am saying so. That is correct that we buy too much gold but not as a Gold investment. Mostly it is jewellery or gold coins at occasions like Akshaya Tritiya or Dhanteras. According to World Gold Council, Indians have approx 20,000 tonne of Gold. Another 557 tonne is held by the RBI. As per my understanding, out of 20k tonne, the only fraction of it would have been bought for an investment purpose i.e. Gold Investment.
Purpose of Gold Purchase
There can be two types of Gold Purchase depending on the objective i.e. consumption and investment. In layman terms, if i buy a jewellery for my wife then the purpose is consumption. Here the word consumption is used literally i.e. when we buy something for own use. On the other hand, if i buy Gold ETF or E-Gold then the purpose is Gold Investment. At the macro level, both types of purchase are termed as Gold Investment. Though it is not true, let’s check out why .
The gold bought in the form of jewellery has emotional value attached to it. I can make out in my house. My mother keeps telling me that this necklace was given by her mother in law or my dad gifted this bangle on the 10th anniversary and so on. The point i am trying to make is gold bought for consumption keep lying in a bank locker. Any appreciation is virtual. In layman terms, there is NO PROFIT booking.
Another imp point is % appreciation. The gold purchased for consumption comes at a premium. If you add retail premium, making charges, wastage, etc then total premium can be as high as 20% to 25% compared to the spot price. Therefore a potential appreciation of 10% to 15% is already discounted if you buy gold for consumption.
On the other hand, Gold ETF price is linked to the spot price of the Gold. A fund house can charge max 1.5% towards expenses. Also, there is NO EMOTIONAL value attached to Gold ETF. It is like any other investment for me. If the price will double in next 2 years i will sell and book the profit.
This post is relevant only for investors who are interested in Gold investment. Similar to property, if you are buying a gold for own use (read: consumption) then you can buy anytime irrespective of current price. On the other hand, Gold investment should be backed by logical & rational macroeconomic/economic indicators. The gold prices may remain stagnant for an unexpectedly long period if the entry point is wrong similar to stocks.
As i shared in my previous posts that it is easy to predict the movement of gold investment compared to equity. The reason being, Gold prices cannot be manipulated. It is widely traded and is scarce resource similar to land. Therefore it cannot be compared with equity in terms of prediction of future price movement. At the macro level, if the economy is not doing well or there is volatility & uncertainty then your gold investment will fly. In this post, i am highlighting the 10 reasons why i am bullish on my gold investment. Lastly, what make me think that my gold investment will double in next 2 years. Let’s check out. The factors are a mix of both local and global factors.
Gold Investment – 10 Reasons Why Gold Prices Double in 2 Years
Gold is the best hedge against inflation. In my opinion, the inflation cycle is reversing. In recent past, RBI has cut interest rates that will further put inflationary pressure. Now RBI is reluctant to cut interest rate because of inflation concerns. I discussed this point in detail in my post, Investments – 5 Factors that will decide the Returns.
2. Brexit: I have discussed it in detail in my post, Brexit – How it will impact your Personal Finance in the long term.
3. Chinese Economy: China is a sort of closed economy. No one exactly knows what is happening in China :). Recently China has cut its growth forecast. China is world’s second largest economy. Earlier in 2016, China devalued their currency and it caused ripples in the world market. Analysts are still worried about Chinese Economy. At the macro level, it is good for Bullion.
Besides Indians, Chinese also makes considerable Gold Investment (read physical gold) and is one of the biggest consumers of Physical Gold. At present, the perceived financial risk is high in China. It may create a risk-off situation in China. In other words, if Chinese investors perceive high financial risk then they will increase gold investment. The experts in western countries are expecting a revival of gold demand in China due slow down in China.
4. Normal Monsoon: The met department has predicted normal monsoon this year after 2 years of drought. It is good for rural India. The farmers are dependent on monsoon for a good harvest. It implies more money in the hands of farmers. In turn, it will increase the demand for gold. Gold is one of the most preferred investment options for Rural India.
5. Recession in World Economy: Experts are predicting the beginning of global recession cycle. Let me clarify that it doesn’t mean that all the economies are heading towards recession. As i shared in the previous post that due to globalization all the economies are inter-connected. A sneeze by the small economy like Greece may cause jitters to economies like USA, China, Japan etc.
The key reason for recession is low demand. If you track the import/export and manufacturing data of major economies, you can also conclude what experts are concluding. During the recession, Gold investment perform better as the gold is the best hedge against uncertainty and volatility. It acts as alternate currency.
6. Ace Investors are Betting on Gold: In India, investors only know two ace investors i.e. Warren Buffet and Rakesh Jhunjhunwala. It’s like if you ask anyone in small town, which English/Hollywood movies you have watched. The 99% people will answer Titanic and Jurassic Park :). You may also find thousands of self-proclaimed ace investors.
Personally, i follow some of the investors like George Soros. He is dubbed “the man who broke Bank of England”. To know more about George Soros you can Click Here. The wall street journal reported that George Soros is betting big on Gold Investment. He is anticipating more economic troubles. He is anticipating the sharp collapse of stock markets may be something similar to 2008 crisis.
Besides George Soros, there are other investors and experts like Marc Faber of Gloom, Boom, and Doom who are bullish on Gold. As i follow some of these experts and can safely say that they rarely go wrong. Therefore, i am also riding the wave and is bullish on Gold Investment.
7. The 7th Pay Commission: I reserved point no 7 for 7th pay commission. It will help Gold in two ways. Firstly, the fact Gold Investment is one of the most preferred investment options for Indians. What it implies is that part of the liquidity in the hands of Govt Employees will flow into Gold.
Secondly, The experts are of the opinion that implementation of 7th Pay commission recommendation will also spur the demand. It will increase the consumption thus will increase the inflation. Inflation will help gold investment as i shared in point no 1.
8. Bond Yields: Recently 10-year bond yield of Germany slipped into negative territory. The Japanese Govt Bond yield is already negative. What it implies is that the investors are paying money to Govt to keep their money. In other words, if the yield is -0.5% then for every 100 Rs invested, i will get Rs 99.5 at maturity.
According to foreign media, $11.7 trillion bonds are trading with a negative yield. It is a bubble that will burst sooner or later. Now you can imagine where the money will flow in case of negative bond yields. The choice will be but obvious Gold Investment.
9. Currency Movement: The experts are expecting that Indian Rupee will remain weak in medium to long term. The fair value of Indian Rupee is Rs 72. In the idealistic scenario, weakening Rupee means an increase in Gold Price. Therefore if the rupee depreciates 6% against the dollar then the gold should appreciate 6%. In other words, 6% appreciation is already on the table. Rs 70 is a psychological barrier as Rs 50 was in Nov 2008. Once it is breached the Indian Rupee will settle at around Rs 72.
10. Gold is trading at the discount: Due to low demand currently gold is trading at around 4% discount in the Indian market. I shared this point in detail in my post, Gold ETF – Make Money When Trading at Discount or Premium. Therefore discount is also a good reason for gold investment. The 4% appreciation is on the table :).
Summary: If you think rationally and logically, the 10% appreciation on Gold Investment is already on the table (Refer point 9 and 10). Though i might sound too optimistic about doubling of Gold Investment in next 2 years but it is quite realistic. From last few years, the Gold appreciation is just in single digit. It is trading sideways. The Bull cycle is around the corner.
Gold always perform well when the economy is in bad shape. During 2008 crisis, gold investment tripled in 3 years in dollar terms. If the world economy performs badly over next few years than doubling of gold investment is a conservative target. Moreover, i am optimistic about following statements from experts
- We are at the beginning/cusp of Major (Gold) BULL Cycle
- Brexit event has triggered the recession for global economy
As i keep highlighting that all the investments are based on judgment and interpretation of current scenario. At any given time, for every buyer, there is a corresponding seller and vice versa. The buyer is expecting an upside and seller is expecting downside. Only a time tells who was right and who was wrong.
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