Gold is regarded as one of the best hedging instruments against uncertainty, and this has contributed to the precious yellow metal’s price peaking in 2020. However, after reaching new highs last year, primarily as a result of the pandemic, gold prices have been falling ever since.
In fact, gold prices in India reached an all-time high of Rs 56,191 on the MCX in August before falling to around Rs 44,000 earlier this month. As a result, it’s understandable that many gold investors and end-users are now unsure of how to plan their next steps. However, before we get into some of the options available to investors, let’s take a look at what’s causing the recent drop in gold prices.
Why are gold prices currently falling?
One of the primary reasons for the drop in gold prices is the US dollar’s consistent rise against other major currencies. The value of the US dollar and the price of gold are inversely related. This means that when the value of the USD rises, gold prices fall, and vice versa. Another factor that may be fueling this trend is the recent rise in the yield on US government bonds. When the bond yield rises, investors usually find it more profitable to park their funds in bonds rather than gold. As a result, they abandon gold in favour of investing in bonds with greater returns.
Should you be worried as a user?
You should not be concerned as an end-user because you are purchasing gold to use as jewellery. If you plan to buy ornaments soon, the drop in gold prices could be a piece of good news because it will also reduce the jewellery making costs in absolute terms. Assuming a 10% making charge, if you had to pay Rs 5600 for 10 grams (10% of Rs 56,000) in August last year, you will now have to pay only Rs 4600 based on current pricing trends. As a result, you can save Rs 1000 per 10 grams when compared to the peak gold prices in August of last year. Gold prices typically outperform the average inflation rate over the long term. If you want to sell the jewellery you bought now in the long run, say after 20 or 30 years, the return will be unaffected by the current market volatility.
What are gold investors supposed to do now?
Domestic investors who have invested in gold for the long term should be unconcerned about the recent drop in gold prices. Investors have been drawn to other assets, particularly equities, as a result of massive stimulus announcements to support the economy and pressure on gold prices. The stimulus liquidity will not last long, and gold demand is expected to pick up again. The INR has also begun to depreciate against the US dollar, falling from Rs 72.45/USD on March 28, 2021, to around Rs 75/USD on April 12, 2021.
In the last 15 days, gold prices in the international market have remained around $1710/oz, while in the Indian market, the price has risen from a low of Rs 44,423/10 gramme to Rs 46,419/10 gramme. This rebound in domestic gold prices can be attributed to the INR’s depreciation against the USD.
As a result, if you continue to invest in gold, you will reap two benefits. One, if the INR continues to fall in value against the USD, the value of your investment will rise. Two, with the possibility of increased market uncertainty as a result of the Covid-19 pandemic’s second wave, the price of the coveted metal may reach new highs soon.
As a result, if you are already a gold investor, you should prefer to make staggered investments into gold at new lows. Short-term investors should avoid accumulating a large position in gold. Long-term gold investors should view every dip as an opportunity to increase their gold holdings. In addition to physical gold, investors may prefer investment instruments such as Sovereign Gold Bonds (SGB) and Gold ETFs. If you want to invest in physical gold, gold bars are preferable to jewellery because they avoid making charges and have a high degree of purity.
Don’t overexpose yourself in gold by putting all of your money into this asset class. In fact, you should try to diversify your investments across asset classes following your financial objectives, risk tolerance, and expected return. According to experts, one should limit one’s gold investments to no more than 10% of the value of one’s portfolio because gold prices tend to flatten over long periods of time, despite occasional highs during rising uncertainties, resulting in insufficient overall returns.
Finally, if you want to add more gold to your portfolio to take advantage of the current low prices, determine whether your portfolio needs to be rebalanced to sync with your financial goals.