Gold shone bright in the first half of 2014

Last Updated: Tue, Jul 15, 2014 17:57 hrs

If you though that investment in equities and riskier asset classes is the 'in thing', think again! The rise in gold prices in the first half of 2014 has been far higher - even more than the consumer price inflation (CPI) seen in India that ranged between 8.79 - 7.31% between January - June 2014.

"Gold is up by 9.2% so far this year. This surprised many market participants as most analysts predicted lower prices. Some investors took advantage of last year's price correction to buy gold but investment demand has remained tepid," says a latest report from the World Gold Council (WGC).

"So far so good: prices are up, volatility is down, and gold has defied the bearish outlook that many gold analysts trumpeted at the beginning of 2014. Early indicators suggest that consumer demand remains resilient, even after a record year in 2013. Central bank net purchases have picked up, adding approximately 180 tonnes to official reserves from January to May 1. At the same time, jewellery demand had its best first quarter since 2005," it adds.

In comparison, most world markets have gained less, except the Indian benchmarks - the S&P BSE Sensex and the CNX Nifty - that moved up around 20% each during this period.

"Only a few assets had a stronger performance: selected commodities (such as grains, nickel and palladium); Indian stocks (benefitting from the BJP sweep at elections); and US REITs (as real estate trended higher)," the report suggests.

Analysts also attribute the rise in gold to the geopolitical situation in the Middle East that created a flutter in the riskier assets like equities.

"Geopolitical situation in Iraq and Syria created a panic-like situation in the world oil and equity markets. Secondly, apart from US and India, the equity markets have not performed spectacularly well. So people opted to invest in gold given the low price and low volatility. Gold proved to be a bargain investment and a hedge in uncertain times. Moreover, prices had seen a huge correction earlier and were in a bearish mode. This has also attracted investors to the yellow metal," says C P Krishnan, wholetime director, Geojit Comtrade.

Should you invest?

WGC believes that investors can benefit by adding gold as a hedge in their portfolios - whether they see this as a tactical response to the current market environment or as part of comprehensive strategy on long-term risk management.

"While gold prices are up, its volatility is down. Way down. It is currently below 11% on a 30-day rolling basis - close to its all time low. Yet, gold is not alone. The VIX, which measures the implied volatility of the S&P 500 index, is trading slightly above 10.0 - a level not seen since 2007. Global equities, commodities, and currencies are experiencing significantly lower levels of (realised) volatility," the WGC report says.

Adding: "Gold also helps reduce long-term portfolio volatility - by acting as a diversifier - and can help increase risk-adjusted returns. Some investors may see the current low volatility environment as an opportunity to add gold; we consider that, in addition, gold should be seen as a strategic portfolio component."

Krishnan of Geojit, however, expects the prices to remain range-bound going ahead. In case there is a sudden spurt in prices, he expects the investors to cash out.

"I don't think we will see a lot of volatility in the prices of in riskier assets unless concerns on the geopolitical front resurface. In case of India, a lot depends on the monsoon and the government policies as well. If we have a good monsoon, prices can pick up by October as the purchasing capacity will go up. Since the chances of a good monsoon and easing government policies are less, I don't expect a significant rise in the prices of gold from here on. At best, they will remain range-bound," he says.

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