Why is Gold flying like a rocket when it’s not even Diwali yet

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Gold prices have had a scorching run this year hitting at a high of Rs 53,797 for 10 gms on Tuesday. Traditionally gold is seen as a safe haven, and people flock to gold when the future is uncertain or people have doubts about a sustained return from other asset classes like real estate and equities. But when people are battling an epidemic, conserving cash and lying low, the huge run-up in gold prices is a pleasant surprise.



Why are gold prices running up?

Since March when the world suddenly felt the full fury of the COVID-19 pandemic, central banks around the world like the US Federal Reserve and European Central Bank came out with ultra-loose monetary policy, printing currency and cutting interest rates to keep liquidity aflush. Add to this the fiscal stimulus announced by many governments to support citizens suddenly shuttered into homes and facing job losses. So in an attempt to fight slowdown induced by pandemic, money is aflush finding its way into gold and equities, explains Praveen Singh, an analyst at Sharekhan.

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The rising tide lifts all boats

From March 31, 2020 till today gold in dollar terms has returned 24.5% while the Dow Jones Index has returned 21%. They say when the dollar weakens, which it is has thanks to US Fed printing more currency, commodity prices increase. Precious metals are finite and hence seen as a good investment candidate when the reserve currency(US Dollar) starts depreciating. Even crude prices have moved up from near negative, but are only hovering around $40/bbl instead of shooting up much higher.

The rupee kicker for gold in India

In 2011 after the US Fed announced its quantitative easing program gold had shot up to above $1900/oz. At that time gold in rupees was around Rs 26,800/10 gms. After a decade of consolidation, gold has returned to above $1900/oz but in rupee terms it has nearly doubled to a high of Rs 53,000 plus per 10 gms. This is because the rupee has depreciated, so locally the value of gold has increased a lot more. While husbands may have cribbed, all wives buying gold would be laughing their way to the bank now!

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What to do now: Buy or Sell gold?

Traditionally Indians rarely sell their gold unless there is financial hardship or it is recycled for weddings. So if there is a requirement, now is the best time to use gold as collateral for short term loans. But if you have spare cash, should you be investing in gold even after such a big run-up? Most wealth planners advise their clients to park only 10-15% of their savings in gold as it is seen largely as a hedge against inflation and not a productive asset. One of the reasons why the government introduced the Sovereign Gold Bond scheme so that investors could benefit from an increase in gold prices as well as interest, without holding physical gold whose import was proving to be a big drain on our dollar reserves. Over the longer-term gold has given very good returns, in fact even outshining equities in the very long term.

If you had invested Rs 10,000 in gold in July 2000, now your money would have multiplied by ten times. Which means Rs 10,000 invested in gold is now worth Rs 1.1 lakh. If you had invested Rs 10,000 in the Nifty in 2000, your money multiplied by 7 times, which is about Rs 70,000 in 2020. Over the last 20 years, gold has given a return of 13% per year which is very impressive. But do remember just as equities, investment in gold has risks, as the price can also correct. Gaurav Ratnaparkhi, Senior Technical Analyst with Sharekhan BNP Paribas says gold is breaking out after a long consolidation and could head higher. He also feels that given the likelihood of economic contraction in India, the rupee could slide back to its recent lows of 77/$. Both conditions favour a good return from gold in local currency.

Gold Table

How to Invest in Gold?

There are many options to invest in gold.

1. Buy gold bars/coins/jewellery

This is a popular choice for many as this investment can sometimes be done in cash and not disclosed to anybody. But you will have to bear storage cost and also pay long term capital gains tax on sale value of your gold. Do remember the resale value of jewelry is comparatively lower than other forms of gold. The purity of gold being bought can also be a big concern.

2. Gold ETF
Investors are allotted units of Gold ETF against their investment. Each ETF unit represents 1/2 gram of 24 karat physical gold. The gold ETFs can be bought and sold on exchanges anytime and are very liquid. Capital gains on gold ETFs are taxed at 20% after indexation if held for over three years.

3. Sovereign Gold Bond

Sovereign Gold Bonds or SGB are government securities denominated in one gram of gold. The Bond is issued by Reserve Bank on behalf of the government. The Bonds bear fixed interest at the rate of 2.50% per annum, payable semi-annually. Plus at the time of sale, you can benefit if the current market price is higher than your investment price. SGBs come with a tenor of 8 years. You cannot redeem the bonds until you have held it for 5 years. Interest on the SGBs will be taxable. But you do not have to pay capital gains tax when redeeming the bond.

You can decide on what options work best for you depending on your liquidity position and financial goals. It is best to consult your financial planner before making an investment.

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