The price rise of gold is not showing any signs of stopping – it swept past the Rs. 25,000 (per 10 grams) mark some time back, and is about Rs. 28,000 per 10 grams at the time of writing!
The questions is: What should you do now? Should you buy gold, hold what you already have, or sell some gold to earn a tidy profit?
The end use of Gold
The very first thing to consider before we start answering the above question is to think why we are buying (or bought) the gold in the firs place. If it is for an end use that is not discretionary – say for your daughter’s wedding – then the price becomes almost irrelevant.
You would end up buying gold irrespective of the price. The quantity would probably change, but the decision to buy can’t!
Gold as an investment
That brings us to the real question – what should you do if you have bought gold or are planning to buy gold as an investment? There are multiple factors to consider.
Gold as an asset class
Gold as an asset class has not provided phenomenal returns in the past (though the past couple of years have been a major departure from this trend). On a long term basis, gold provides returns that are in-line with inflation.
That is, it preserves its value. If 10g of Gold could buy 100kg of wheat in 1990, 10g of Gold can buy 100kg of wheat today as well (these are just random figures to illustrate the concept).
Basically, investment in Gold is not for generating returns. It is for safety.
Returns from gold are inversely proportional to returns from most other asset classes. During times of crisis and economic turmoil when all other asset classes go down in value, the value of Gold normally goes up (something that is definitely happening right now).
(For more, please read “Shine matters – Gold is not old“)
How is the price of gold decided?
What are the factors on which the price of Gold in India depends?
You know that the price of Gold is basically quoted in USD (US Dollars) in the international market. This price depends on many factors, but as mentioned above, the main thing driving Gold’s price is the economic environment.
This international price is then converted into INR (India Rupees) using the prevailing exchange rate. So if the price of Gold internationally is $1,800/oz (per ounce), and the exchange rate is Rs. 45 to a US Dollar, the price of Gold in India would be about Rs. 28,572 for 10g.
How is this relevant? This is extremely relevant, because it tells us that the price of Gold in India depends heavily on the USD / INR exchange rate!
For a prolonged time, the value of the Indian Rupee against US Dollar was going down. So, even if the price of Gold internationally remained the same, the price in India would go up just because the Rupee became weaker!
But now, we are seeing a reversal in trend. The Indian Rupee is more or less stable (at around Rs. 45 to a US Dollar). With India growing at the second fastest rate in the world, and with most other major economies still struggling with the economic crisis, these is a good possibility that the Rupee would become stronger. And this would have a negative impact on the price of Gold in India.
Example
At $1,800 per ounce and a USD / INR exchange rate of Rs. 45, Gold is Rs. 28,572 per 10g. If the rate of Gold goes up to $1,850 and the exchange rate moves to Rs. 42, Gold would be Rs. 29,060 per 10g! So, there is a real possibility that the price of Gold in India would actually go down even if it goes up internationally!
Where is the world economy moving to?
This would impact the international price of Gold, which would have an impact of Gold prices in India as we saw above. So, where do you think the world economy is going?
If you think that we are recovering from the economic downturn, then the price of Gold would go down in the international market. And if you think that we are going to see more trouble going forward, then the price of Gold would go up in the international market.
Conclusion
If you are investing in Gold, be a savvy investor. Think of the long term and consider the points mentioned above before taking your buy / hold / sell decision.
My take? I believe the price of Gold would cool down in the coming years, and this is a good time to book some profits if you are already invested in Gold.
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