The 3.5% sharp fall in global prices of gold on 20 June was quite unexpected despite the bearish trend in the precious metal. The 0.6% rebound in prices the very next day also a bit surprising, but underlined the notion that the sell-off and the ensuing panic might have been overdone.
Nevertheless, global macroeconomic conditions are such that gold prices are unlikely to move much higher and indeed the scale is heavier for some more decline from here. That Indians love to buy gold is an established fact, but do lower prices also beckon increasing your investment allocation to gold?
What’s causing gold such pain?
The impact of dollar movement is foremost for gold prices. The US dollar and gold prices share an inverse relationship—strengthening dollar means falling gold prices.
Then there’s lack of demand from exchange-traded funds as demand for risk assets increases.
Moreover, jewellery demand and sovereign bank demand is insufficient to support prices.
Is it worth buying at lower prices?
Historically, a rally or a bearish trend in gold prices has lasted for periods as long as 10 years. The recent fall in price has also come after a 12-year rally in prices. Also, macroeconomic conditions globally are not supportive of any near-term rally in prices, and an interest rate hike by the US Federal Reserve can dampen sentiment and gold prices further.
Remember that gold is only a store or value and doesn’t help money grow; it neither pays you an interest nor do you earn dividends by investing in it. For this purpose an allocation more than 5-10% of your portfolio is not recommended. Having a high allocation to gold can drag your portfolio returns rather than bring stability.
Time to rethink your long-term gold strategy
It’s time to rethink your approach to gold. If you are accumulating gold for your daughter’s wedding 10 years hence, you will be better off investing in growth assets for the period and using the gains to buy gold when you need it. If you love gold jewellery and want to buy for immediate consumption, this a good price to buy.
Another 5-10% correction can’t be ruled out, but prices are unlikely to fall below that in a sustainable manner, as cost of production will be higher than the market price.