Gold prices continue
to crash: No need for Indian investors to worry? Apr 16, 2013, 10.15AM
IST
After giving fabulous returns
for nearly a decade, gold has done the unthinkable. It has
actually declined in the past six months! What has turned
this safe avenue into a loss-making investment?
The main reason for gold's short-term weakness
is the rise of the dollar due to the economic crisis in
Europe. The dollar has also moved up on the hopes that the
US economy is emerging from its crises, which could nudge
the Federal Reserve to withdraw the stimulus package earlier
than expected.
The return of confidence in the US economy
has also seen investors shifting money from safe havens
like gold to riskier assets like stocks. Does this mean
you should dump gold from your portfolio? Most experts believe
it is too early to do so. However, they also warn investors
to be careful because the metal is trading close to its
long-term support levels.
While the global outlook for gold is decidedly
bearish in the short term because of the strengthening dollar,
the situation could reverse if the US economy does not recover
as expected. However, gold price has come up from $260 to
the current level in a decade and, therefore, a lot of the
factors that are positive for gold are already priced in.
In other words, gold is at the fag end of a multi-year rally,
and once the bear market starts, be ready for a sharp fall.
However, Indian investors need not be worried
about a steep fall in prices. The 1980 crash in gold was
not felt in India because the appreciation of the dollar
against the rupee buoyed the domestic prices. The situation
right now is similar, with the rupee having fallen against
major global currencies.
While this may not be good for the economy
as a whole, a weaker rupee will prevent domestic gold prices
from crashing.
ET takes a look at what prominent global
analysts and investment banks have to say about the direction
of gold prices and its safe haven status:
Shankar Sharma:
Shankar Sharma told ET Now that gold is
a good investment bet for domestic investors. "If you
are a local investor, I still think gold is a good bet for
you. Even though on the dollar price of gold, I am very
bearish, I see that going to like maybe $1350 thereabouts,
but the rupee price of gold might be a very different kettle
of fish," he said.
"The depreciation of rupee, which
almost inevitably happens when you have a weak market of
that kind that I foresee, will help," he added.
Vikram Dhawan, Equentis Capital:
"The current price action has severely
damaged sentiment towards gold. Unless there is renewed
central Banks buying globally the upside may be fairly limited
from here onwards," he said.
Also we are unlikely to see any significant
mine closures as most producers still make money even at
current prices. There is a genuine risk that we may enter
a multi-year bear Market although total collapse in prices
may be prevented due to jewellery demand from the emerging
economies especially India," he added.
Dhawan opined that technically, gold is
oversold and poised for a bounce in the near term.
George Soros:
In early April, institutional investor
George Soros said gold has been destroyed as a safe-haven
asset, but that he expects continued central bank buying
to support prices.