Gold is considered to be one of the best hedging tools against uncertainty, which will help make the price of precious yellow metals reach its peak in 2020. However, after hitting a new high last year, mainly due to the pandemic, the price of yellow metals has started plummeting ever since.
Prices of gold in India
In fact, the price of gold in India touched MCX’s all-time high of Rs. 56,191 in August, but after plummeting to Rs. 44,000 at the beginning of this month, it is now climbing upwards.
Therefore, it is understandable that many gold investors and end-users are now stuck in how to formulate their future action plans. However, before discussing some options for investors to choose from, let us understand the reasons for the recent plunge in the prices of the yellow metal.
Why Are The Prices Of Gold Falling Now?
The continued rise in the U.S. dollar against other major currencies is one of the main reasons for the decline in the prices of gold.
The gold prices and dollar are inversely proportional. This means that when the U.S. dollar appreciates, the price of gold falls, and vice versa.
Another factor contributing to this trend may be the rise in U.S. treasury yields (bonds) in the past few months. Generally, when bond yields rise, it is more lucrative for investors to deposit funds in bonds than gold. Therefore, they abandoned gold and focused on investing in bonds to obtain greater returns.
As An End User, Should You be Concerned?
As an end-user, you don’t have to worry, because you are buying gold for jewelry. If you are planning to buy jewelry in the near future, the drop in the price of gold may actually be good news because it will definitely reduce the cost of making jewelry.
Assuming the manufacturing fee is 10%, if you have to pay 5600 rupees (10% of 56,000 rupees) for 10 grams in August last year, then according to the current price trend, you will now only have to pay 4600 rupees. In this way, you can save 1,000 rupees for every 10 grams compared to the highest gold price in August last year.
In the long run, gold prices usually exceed the average inflation rate. In the very long term, for example, after 20 or 30 years, if you want to sell the jewelry you have purchased now, the return will not be affected by the fluctuations in the prevailing situation.
What Should Gold Investors Do Now?
Domestic investors who invest in gold for a long time do not have to worry about falling gold prices. Due to the numerous stimulus measures introduced to support the economy and the pressure on gold prices, investors have attracted other assets, especially stocks i.e equities.
The stimulus liquidity will not last long, and it is expected that the demand for gold will start to pick up again. The Indian rupee (INR) has also begun to depreciate against the US dollar, from 72.45 rupees per US dollar on March 28, 2021, to 75 rupees per US dollar on April 12, 2021.
The prices of gold in the international market have been remained at around 1,710 US dollars per oz level in the past 15 days, while in the Indian market, the price rebounded from the low of 44,423/10 rupees during the same period to 46,419/10 grams.
The bounce-back in the domestic gold prices can be attributed to the depreciation of the Indian rupee value against the U.S. dollar.
Hence, as an investor, if you continue to invest in gold, you will get two benefits. First, if the INR depreciates further against the U.S. dollar, the value of your investment will increase. Second, due to the second wave of the coronavirus pandemic and the possibility of increased market uncertainties, the coveted metal prices may reach new highs again in the near future.
Therefore, if you are an existing gold investor, you should prefer staggering investments in gold during the new downturn. Short-term investors may avoid taking higher positions in gold. Long-term gold investors should view bargain hunting i.e dip as an opportunity to increase gold in their investment portfolio.
Investors may prefer investment tools such as Gold ETFs and SGB (sovereign gold bonds) against physical gold. If you are interested in investing in physical gold, you can choose gold bars instead of jewelry to avoid paying making fees and ensure a high degree of purity.
Don’t hold too much exposure i.e overexposed position in gold just by investing all your funds in that asset class. In fact, you should try to diversify your investment into different asset classes to fully meet your financial goals, return expectations, and risk appetite.
Experts suggest that people may limit their gold investment to a maximum of 10% of the value of their portfolio value because although rising uncertainty leads to occasional high prices leading to insufficient overall returns, the price of gold tends to stay flat for a long time.
Lastly, if you want to add more gold to your portfolio to take advantage of the current low prices, you must check to see if your portfolio needs any rebalancing so as to keep up with your financial goals.