The reason for the rise in gold prices by a significant percentage is on account of concerns over financial stability and global growth, mixed trends in global equities, inflows into bullion funds and buyers’ interest in accumulating the yellow metal on any meaningful price correction. Besides, speculative interest in the commodity can cause price rise in both the metals.
Also, investor holdings of gold through exchange-traded products are expanding at the fastest pace in a year, and the value of gold held through exchange- traded products (ETPs) has jumped by $3 billion in 2016.
SPDR Gold trust, the world’s largest gold exchange-traded fund, gives a good indication to investors of the sentiment on the yellow metal. Investors have been buying gold for most of 2016.
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As of October 26, 2016, SPDR gold holdings stood at 942.59 tonnes, which was around 42 per cent higher from 661.94 tonnes seen last Diwali.
Speculative interest is on the rise, wherein hedge funds have increased exposure to the commodity for most of the year. As of October 18, 2016, money managers are net longs in the yellow metal at 137,260 contracts compared with net longs of 21,530 contracts as of November 10, 2015.
India’s gold imports have declined 58.96 per cent to 270 tonnes between January and September from 658 tonnes that were shipped in during the corresponding period last year.
The prime reason for low demand from one of the biggest gold consumers was the prolonged strike by jewellers to oppose the 1 per cent excise duty and continuation of 10 per cent customs duty on imports that the government had imposed.
In the global context, there are many uncertainties, which have created a safe haven environment for the yellow metal. The outcome of the November presidential election in the US and the US Fed meeting in December are two key events that will give direction to gold prices.
The way forward:
Diwali, the festival of lights, is just around the corner. While it means lighting lamps and eating sweets, it also means giving and receiving gold.
However, looking at Indian gold demand for most of 2016, it has been sluggish. However returns on the commodity will encourage investors to invest in gold, though consumption patterns do not offer much hope.
Indians consider it auspicious to buy the yellow metal on Dhanteras. But instead of buying physical gold, our advice to investors would be to invest in the sixth tranche of sovereign gold bond scheme (open from Oct 24 to Nov 2), and help the government limit gold imports, which in turn will help lower our current account deficit (CAD) and outflow of foreign exchange reserves.
For those who prefer to hold the physical metal, our advice is to accumulate it on every dip rather than concentrating all the purchases at one go. This will help one take the benefit of value-cost averaging.
As for gold consumption during festivals, India’s gold imports in October 2016 are estimated at around 60 tonnes vis-a-vis 30 tonnes shipped in a month before. Hence, the festive demand for gold will cause a spike in prices in the short term.
For those, who want to take the benefit of value cost averaging; any dip towards Rs 28,000 and Rs 28,500 levels should be taken as buying opportunity for possible price movement towards the Rs 32,500 mark. (CMP: Rs 29,920/10 gm).