Gold prices continue
to crash: No need for Indian investors to worry? Apr 16, 2013, 10.15AM
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
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
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 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,"
"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,"
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.
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.