Should you invest in Gold in 2016?

Investors believe that the best time to invest in gold is when:

  1. Inflation is expected to take hold or
  2. Faced with a declining U.S. dollar.

Owing to India’s sound macro-economic conditions in recent times, we have a witnessed lower inflation with even negative WPI (due to falling commodity prices), which is considered as the main measure of tracking inflation (Rising Prices). Also, the US Dollar is at its strongest in the past 10 years, and is expected to remain strong, further putting pressure on Gold prices. (The reason gold is at a disadvantage from a stronger U.S. Dollar is because gold is priced in U.S. dollars globally.)

Lately in Dec’15, the US Fed Reserve increased its benchmark interest rate by 25 basis points (Read how it impact you here), apparently, its first such interest rate hike since 2006.  Investors expect the US Fed to further increase interest rates in 2016. This would lead to an increase in demand for dollar, and put pressure on prices of linked commodities such as silver, oil, gold, copper, etc..

Return on Investment (ROI)

Gold ended with negative returns in 2015 for the 3rd year in a row. In Indian rupee terms, spot gold ended with -6% returns in 2015 and around -8.5% CAGR for the period 2013-15.

Impact of Government’s Gold Monetization Policy

One of the objectives of a Gold Monetization Scheme is to unlock the value of this non-productive asset. Through the gold monetisation scheme, government plans to recycle existing private holdings of gold. If Gold Monetization Scheme is successful, then there will be a sudden increase in the supply of gold, which, in-turn will reduce the import of Gold, and will decrease the Gold Price. Therefore, the demand of Gold from India is likely to fall leading to a dent in the gold prices globally.

Alternative Financial Instrument

Owing to the sluggish return from gold in the last 3 years, the demand for Gold is expected to fall as households move away from physical investment to investments in financial instruments like FDs, MFs, and Equity. Looking at the numbers, we see that the savings in financial instruments have increased substantially to roughly 40 percent in last 2 years.

Conclusion

Gold is a Non-Productive Asset. At best, Gold in a financial portfolio act as a hedge against inflation. Improving economic growth, rising US Dollar, and slugging returns from Gold in the past 3 years, may not put up a strong case against Gold as the best investment avenue this year.


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Surbhil is a technologist at heart and aims to enhance the user experience in his customer engagements. He enjoys making financial world simpler and easier to understand through his blogs on Markets, Economy and Tech. He is an IIM L alumni.

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