Is there a right time to buy gold?

Market Commentary 08 Sep 2017

Gold Investment Benefits

The underlying objective of an investment is creating wealth to achieve our financial goals. And the goals could be owning a house, funding for education or wedding, providing for retirement and health care. Therefore, it is important that your investment decisions keep in mind your personal financial roadmap.

Based on your goals, risk appetite, and real income, you can invest your money across a portfolio of select asset classes. Time, too is a crucial factor in this context. You should consider the maturity period of each investment, in order to decide the right time to buy or sell so that your aspiration or goal can be accomplished. Including time in the investment decision is a smart approach to ensure you reap better returns.

Gold for long-term benefits

One of the popular and common investment advice doled out is “buy low and sell high” for obvious reasons – maximise profit. And it isn’t much different for gold, given one is not chasing trends and following the herd. This psychological bias implies buying when the price is rising, and selling when the price is falling, so one doesn’t miss out on the opportunity to make hay while the sun shines. The problem arises when a novice investor is unable to figure the range of “high and low” movement. Subsequently, you may be left with either insignificant returns or considerable losses.

So, the right time to buy gold is when the interplay of all the factors that affect its price are poised for steady and long-term appreciation, notwithstanding the short-term volatility.

Forces that pushes price up or pull it down

The price of gold in India is associated with the price prevailing in the international markets and the currency adjustments. This is because India imports a majority of its gold. So, the factors affecting gold prices have a global context. The influential factors are listed below:

  • Political certainty: Gold turns into a preferred investment when sentiments are overshadowed by dark clouds of political uncertainty. Money starts to fervently chase gold rather than equities. So investors prefer to not sell gold, instead buy more.
  • International monetary policies: Rising interest rates and end of easy money policy by central banks take gold prices in a downward spiral. A regime of interest rates lower than inflation, renders gold as an attractive investment opportunity. This is because of lower opportunity cost of diverting investments to gold, away from interest-based assets. However, when the interest rates rise, investors shift to the higher guaranteed return from debt instruments.
  • Inflation: Gold prices rise with rising inflation and fall with lower inflation. Gold is considered a safe haven in economic volatility, particularly inflation. The long-term stability in gold prices makes it a secure asset class when money is dear. Thus, the demand for gold increases during inflation, affecting its price.
  • Currency devaluation: A strengthening U.S. dollar, in the wake of optimistic growth sentiments, pushes down gold prices. This is because gold and the U.S. dollar have an inverse relationship as observed in 2016. During that year, weaker U.S. dollar was instrumental in pushing the gold prices higher.
  • Government duties/taxes: Import duties increase the price of gold in India. Therefore, it is used by the government of India to discourage imports.
  • Demand and supply dynamics: As with any good or service, increased demand tends to push gold prices up. In this context, the jewellery market turns out to be a relevant factor. Purchase of jewellery and coins as a cultural practice in India thus peaks during the wedding season and festivals such as Makar Sankranti, Pushyami, Ugadi/Gudi Padwa, Akshaya Tritiya, Navratri, Dussehra, Dhanteras, and Balipratipada. Here are some important days when buying gold is considered auspicious.
The right time is…

The right time to buy gold is when an investor perceives the value in adding the long-standing lustre of an undisputed asset class, to their portfolio. In fact, to take advantage of any near-term fall in prices, investment in gold can be distributed over a span of period, considering modern investment options that allow regular but small investments over time.

 
Sources

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