The GOLDen investments - An Ethmos perspective

Gold is considered to be one of the precious metals.  Bharat is one of the major importers of gold. As far as Bharat is considered, the rate of gold is an important topic in the household where wedding is about to be held. Because in these big fat Bharatiya weddings, the 20 % or more of the expenses will be towards gold jewellery and other ornaments. These ornaments are made not with investment in the mind but rather as an "ego-booster" to appease the groom’s parents and increase the reputation in the society that  “Mr so so has given so much gold in his daughter’s wedding." On a serious note gold rates are actually affecting the Bharatiya economy.

Gold is an auspicious metal in Bharatiya mythology; we Bharatiyas celebrate “Akshay Tritiya."  On this day, it is customary that gold will be bought. This shows the emotional attachment of the Bharatiya public with the yellow metal.  Suddenly the gold prices in Bharat are at an all time low since 2009. This calls for an analysis - how will it impact the Indian economy?

For understanding the reasons, you need to understand the basics of demand and supply.  When demand of anything is more and supply is less, the prices rise.  When demand is more and supply is adequate, prices remain stable.  And when demand falls while supply rises, the prices reduce.  This principle applies to the gold also - the demand for gold has reduced - but where?  In Bharat?  NO - actually it is in the world's mightiest economy - the United States, which is what is causing this price reduction of gold.

What happened in US markets?

United States had been fighting one of the worst recessions since 2009 but the economy is coming back on track.  And hence for the first time after 7 years, the US Federal Reserve has shown indication that the interest rate on bonds will rise.

What does that have to do with gold?  Investors during the time of recession avoided the investment in bonds and banks because of zero or nil interest rate regime. However after a long time US fed has proposed that interest rate will increase. The bond market has improved significantly.  Investors are showing interest in investment in bonds as they are safer to invest than any other investment even though the opportunity cost is low.  Please note that the first thing anybody will think before putting their hard-earned money is that whether their money will remain safe or not - and what will be safer than the bonds guaranteed by the US government.  Hence, the sudden surge in the bond market actually made investors move the investment from other form of securities (like Gold) to US bonds.  So we can say that gold is not glittering any more in the US now.

How it impacts Bharat? Major impact will be the outflow of FIIs (foreign institutional investors, i.e. the foreign investment firms (and not individuals) who have invested heavily in Bharatiya markets).  This will directly impact the Foreign Direct Investment that have been planned by the Modi Government for young  and vibrant Bharat; however, the Bharatiya Rupee is also quite stable at this point of time (although running very weak!).  The outflow of funds from Bharat will directly affect the stock markets - plainly speaking, our share market will fall and the US markets will rise, although for a very short span, and the outflow of funds will also impact our forex reserves to some extent. Probably the US dollar will strengthen more against Indian rupee in the near future, i.e. the dollar will be more costlier and the price of rupee will fall.

Now gold as an investment at this point of time is quite tempting, but probably by November-December, the gold may touch an all time low. The reason being the declining prices at the world level. The prices at the world level are impacting the prices in India as well. It is expected that more and more gold will sell at commodities exchange as the investors are preferring to move to  other safe securities such as US bonds.  So it is expected that prices will again decline at the world level.  It is expected that the same will pass on to the Indian gold markets as well.  However, the reduced prices of gold will directly impact the gold reserves of Reserve Bank of India and gold loan portfolio of the leading public sector and private sector banks. It has been observed that the gold loan portfolio of banks have increased considerably. This might hamper the value of gold that has been pledged against the loan as well. So the appropriate steps need to be taken up by the banks.

Step that can be implemented by the Reserve Bank of India and other banks is that they can invest in gold at all time low prices, which will help them in having the considerable amount of liquid security at low opportunity cost and it will also control the price of gold in domestic market to an extent.

Investment tips 

Short selling:  Probably after November/December, the prices of gold will stabilize as by that time the US fed will declare the bond rates. So the short selling will be an opportunity for investors.

Long term:  If the investment is for a long term, then it will be beneficial if the investment is made in November/December as by that time, the prices of gold will stabilize.

We believe that for an educated investor, there is always opportunity in any market regardless of whether it is a bear or a bull run.

Happy Ethmos to all!