No need to get aggressive on gold

Last Updated: Mon, May 13, 2013 04:31 hrs

Indians love gold. We love to wear gold jewellery. We love the fact that we can borrow money using gold as a security. We also love the fact that returns from gold can beat inflation, which very few financial instruments in India can.

So, when the price fell to a two-year low of Rs 25,790 last month, Indians were thronging jewellery stores. Due to heavy demand, some stores even ran out of jewellery and gold coins. Even our festivals are incomplete without gold. During the year, occasions such as Akshaya Tritiya, Dhanteras during Diwali and Raksha Bandhan are some days when it is considered auspicious to buy gold. Even a nominal 1 gm is enough.

So, should you buy gold on Akshaya Tritiya, which falls on May 13?

Although prices have seen a slight recovery after the sudden dip in April, there is no reason to rush and buy now, fearing prices will rise from these levels. According to experts, prices are likely to fall further and there will be plenty of opportunity to buy later in the year.

According to C P Krishnan, whole-time director of Geojit Comtrade, the gold market has entered a bearish territory after prices fell 31 per cent from the lifetime peak in November 2011. Signs of revival in the US, a strong dollar, fears of central banks selling and possible withdrawal of the US Federal Reserve's bullion-friendly bond buying scheme by the end of this year are the key bearish fundamentals behind the recent sharp drop in prices.

As on January 1, the price for 10g gold was Rs 30,645. On April 17, it fell 16.2 per cent to Rs 25,680, the lowest in the year so far. Currently, it has recovered to Rs 27,000, still 12 per cent less from the beginning of the calendar year. "For this Akshaya Tritiya, rather than buying physical gold, one can opt to take positions through exchange traded funds (ETFs) or through futures or spot exchange platforms in small lots. Every downside correction in prices can be used for buying more gold, as on a very long term perspective, prices could probably recuperate the current losses. Immediately, more corrective selling may be anticipated," he says.

It is advisable to buy 50 per cent or less of the amount of gold you want to buy on Akshaya Tritiya, says Renisha Chainani, commodity analyst - capital markets (individual clients), Edelweiss Financial Services. "You can buy more on other occasions like Diwali and Raksha Bandhan, since prices are likely to drop down to Rs 25,000-26,000 (for 10g) ," she says. While the average annual returns from gold over the past 12 years have been 16-18 per cent, the appreciation this year is likely to be much less, says Vibhu Ratandhara, assistant vice-president (commodity), Bonanza Portfolio. "Buy gold only if you are buying for the occasion of Akshaya Tritiya. This is not the time to buy gold as an investment because one more round of fall in prices is likely to happen before June," he says.

Since 2013 might not provide positive return to gold investors, those who want to buy at current levels must hold positions for a longer period, advises Krishnan. "The immediate outlook seems weak," he says.

According to Chainani, investors should be prepared to hold on to their investments for two or three years and should not expect more than five-six per cent returns from the current levels. That is why, she also advises reducing the share of gold in the total investment portfolio to 7-10 per cent now; earlier, 10-15 per cent was considered safe. "Don't invest lumpsum amounts. Do it through systematic investment plans, so that you get a good return," she says. Krishnan also says it's better to reduce holdings in gold and reinvest later in dips.

There is an increased demand for not only gold coins and jewellery but ETFs have also seen an increase in inflows during occasions such as Akshaya Tritiya. Data from the National Stock Exchange show from 2009-2013, the traded value in ETFs has seen a spike on the days of Akshaya Tritiya. It has also seen an increase over the years. For instance, in 2009, the traded value in ETFs was Rs 13 crore, in 2010 it was Rs 172 crore, Rs 423 crore in 2011 and Rs 609 crore in 2012. However, those considering investing in gold through ETFs must remember the fund management charges will eat into the returns, says Ratandhara.

Banks also report higher sales on such occasions. According to Kotak Mahindra Bank, the sales of gold coins on Akshaya Tritiya, compared to sales during the whole year, has been increasing over the years. In 2008, the sales on Akshaya Tritiya were 31 per cent of the whole-year sales. In 2009, it was 36 per cent, 40 per cent in 2010, 48 per cent in 2011 and 44 per cent in 2012.

According to Rajiv Popley of Popley Jewellers, when gold prices fell, many customers pre-booked jewellery for Akshaya Tritiya and also locked into gold savings plans at the prevailing prices. "Customers opt for pre-booking only when they feel prices will go up in future," he says.

Puneet Kapoor, executive vice-president of Kotak Mahindra Bank, also feels sales would not be affected on Akshaya Tritiya. "There is a demand in the market which is price-agnostic," he says. So, on this Akshaya Tritiya, buy only part of what you plan to buy.

More from Sify: