Gold prices have cooled off by 25% from record highs seen in August 2020. Trading at Rs 46,400 per 10 grams today, gold had tested Rs 56,000 levels last year.
According to Ravindra Rao, Head – Commodities at Kotak Securities, ‘the downside will be limited, but the upside is looking good’.
“This is a good time to buy. The major reason behind prices going down is the boom in equity markets,” Rao told Money9 in an interview.
He explained the reason for gold prices to surge in the last two years were because of its ‘safe heaven’ status. As ETF buying increased last year with markets crashing, gold prices started rising.
“The inverse relationship between equities and gold has been visible historically. Gold and equities are in perfect negative correlation. Although sometimes there have been cases when both gold and equities rose together, but gold slowly cooled off,” he said.
“The current low price is a good chance for people who did not enter at the higher level. One should be on a staggered buying approach instead for going for it all in one go” Rao added. “The averaging effect becomes an advantage. That’s what systematic investing is. A bit volatility here or there won’t matter much. Even if gold reaches Rs 50,000 (10% below its peak) you will be profitable,” Rao said.
On the question of timing the gold market, Rao said it is always a bad idea to try. “Catching the bottom becomes difficult because a lot of factors like Dollar strength, US Treasury and domestic equity markets define prices. We are anticipating a support price of $1760 – the current level – but it may go lower to $1700 or even $1680 levels,” he said, cautioning that systematic small investment should be started without anticipating any further correction.
“This is the right opportunity for investment at Rs 46,000 levels in India. We have seen a 25% fall in prices. For investment in any asset class, timing the market is the wrong way to invest,” he said.
“Gold is the right portfolio diversifier in this environment,” Rao said.
Analysts suggest a 10% portfolio allocation to gold and Rao believes it could be upped at this time to a higher level. “10% may be increased to 12.5% or 15%, but not brought down below 10%,” he advised.
“Investment options include Gold ETF, Gold Mutual Funds and Sovereign Gold Bonds (SGB). If liquidity is the goal, go for ETF or Mutual Funds. But if you are looking at the long term, go for SGBs because while it has an 8-year lock in, it also gives additional interest,” Rao said.
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