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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.

Gold prices continue to crash: No need for Indian investors to worry?
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