WILL GOLD SHINE BRIGHTER?

Global uncertainties and a weak dollar will keep the yellow metal buoyant

With the festive season round the corner, many of you will be planning to buy gold. Gold prices have shot up recently with international prices hitting the psychological mark of $1,300 per troy ounce, gaining close to 15 per cent this year (till September 15). Keeping in step, domestic gold prices have also gone up by around 8 per cent over the same period, touching a high of Rs 30,388 per 10 grams. The difference in international and domestic gold prices is due to currency fluctuations, in this case the rupee-dollar rate. So what is driving this surge?

GEOPOLITICAL TENSIONS

A big reason for the recent spurt is the tensions following North Korea’s rogue actions, specifically Kim Jong Un’s ultimatums and the nuclear blast test, and the subsequent US sabre rattling. Given the unpredictability of both leaders, these tense conditions have intensified the risk of a possible nuclear war, which in turn has led to an increase in demand for safe assets like gold.

WEAKENING DOLLAR

The dollar index (which shows the value of the dollar against other currencies) has slipped around eight per cent this year on account of poor economic data such as low inflation and poor non-farm payrolls data. The US consumer price index rose 1.7 per cent y-o-y in July, but was lower than the forecast of 1.8 per cent. This has further reduced the chances of another Federal Reserve rate hike this year. No rate hike means weak demand for dollars as it will be unattractive to buy them, thus again raising the demand for the yellow metal. Apart from this, the damage done by Hurricane Harvey and Hurricane Irma has also hit the US economy and the dollar, which has further escalated demand for the yellow metal.

WILL THE RALLY CONTINUE?

Any type of uncertainty is good for gold and will keep its price high. However, experts believe the current gold prices have factored in the high volatility. Of course, any worsening of the crisis in the North Korean peninsula will result in heightened uncertainty, which will nudge gold prices further up. On the domestic front, however, the increased prices may suppress demand during the upcoming festive season.

WEIGH YOUR OPTIONS

Today, there are multiple options to buy gold, catering to every need. The traditional form is buying jewellery, which involves making charges and other incidental costs and thus is not advisable from an investment perspective. There are other ways of investing in gold such as bars and coins, in non-physical form such as gold ETFs (exchangetraded funds) and sovereign gold bonds. Gold ETFs are mutual funds listed on exchanges and are traded like shares. You need a demat account for this. Sovereign gold bonds are issued by the RBI on behalf of the government, in which you can invest in a minimum of one gram (one unit), going up to 500 grams. You can invest when the issue is open or buy from an exchange as they have to be listed. The bonds give 2.5-2.75 per cent interest per annum on the amount invested, and capital gains are tax-free, which is not the case other gold investments.