Should I wait or start investing in gold now?

Will Gold prices drop further? Should I wait or start investing in gold now?

Gold prices are currently near fair levels ... I would still not expect much upside in the next 12 to 24 months ...

So, even if you start investing now, do not rush in with all your money. You can start investing some savings on a monthly basis. You can aggressively start buying from 2015 ....

Please note that USD to INR is now at 55 ... If that falls to 50 in the next 2 years, that will drag Gold prices in INR by 10% ...

Originally Posted by tradingfreak

Will Gold prices drop further? Should I wait or start investing in gold now?

Hi tradingfreak!

We suggest you to stay away from buying gold for the time being. Gold is not going to rally on the upside as of now. The institutional investors are selling but physical buying by the retail investors has created some upside. The retail investors will end buying after a time and then the demand of gold will be negligible. Our view is bearish in the very short term (nearly two weeks), short term (nearly 3 months), medium term ( for 1-2 years) and bullish in the long term( 3 to 10 years) .

Gold has saw massive rally since 2001 and had a one way move with some correction and consolidation in the last two years. In the last five decades the rally of 2001 is the longest with price increase of 608% till 2011 August. The Gold was at $ 258 per ounce in 2001 and extended its rally to $1826 in 2011 with intraday crossing above $1900. If we see the history, after last rally gold prices saw correction of nearly 40%. The gold prices logged nearly 11% decline in the two days but still lot of correction is to take place. On the worst we expect that Gold prices will shed $200 more from its current price of $1443 per ounce.

Reasons for Sell off in Gold:

The slowdown in US inflation and Fed’s announcement of winding up their stimulus plan brought slow and steady sell off in the precious metal; however the reports that Cyprus is planning to sell its gold reserves to cover its debt further rattled the gold market. The investors after the announcement of QE bought gold as they were afraid of fast growing inflation after that but so far the inflation remained under the decided targets, greenback rose against the major currencies and furthermore the economy also saw some improvement.

Investors usually buy gold considering it as safe haven and a sort of insurance at the time of financial crises. There has been lot of financial turbulence in nearly five years including US default threat, Euro zone meltdown etc but none of this sustained. So, considering this and the fact that central banks are supporting their economies with every possible measure dissipated the fear factor of investors and they ignored the need of insurance.

The rise in the prices of stock markets with US equities at their all time highs indicated that investors are moving towards the riskier assets and if the US economy continues showing improvement , we may see interest rate increase by Fed and equities touching fresh highs. The gold seems to be an attraction when the interest rates are near zero, but if they would be increased, the attraction towards gold will fade.

Reason for Buying in Gold:

We don’t see any major reason for buying in Gold except the re-emergence of the financial crises and the devaluation of currency which does not seems to happen in the near term scenario. The currency war is already going on and the worldwide criticism indicates that it will not happen. As we know that the economic scenario is returning back to normal and no further easing is expected from Fed, so there would not be much buying in Gold. The retail investors are buying gold but that would not affect the prices much and after a while we expect the retailers also to come up with selling in market.

Gold showed sharp jump of 200% in the last four years, so just a minor drop of nearly 11% should not create much of panic. In India the gold prices will follow similar track with less of negative macroeconomic events in the coming scenario. The rupee depreciation, widened current account and any major happening in economic level will support the spike in gold prices but the chances of these happenings is very bleak.

Regards
Finvasia Research