Outlook on Gold by Mr. Amit Rathi (Managing Director - AnandRathi Financial Services)
Gold ended with negative returns in 2015 for the 3rd year in a row. In Indian rupee terms, spot gold ended with -6% returns in 2015 and around -8.5% CAGR for the period 2013-15. We expect 2016 to be no different with Gold maintaining its weak trend.
The factors that would put pressure on Gold include:
Dollar is at its strongest in 10 years and is getting stronger as the rest of the world currencies are turning weak. The US central bank has moved towards tightening the monetary policy after almost 9 years and there is a high chance that they will continue to hike rates in 2016. This would lead to an increase in demand for Dollar and pressure on prices of correlated commodities such as Gold, Silver, Oil, Copper, etc.
Falling demand for Gold: Demand for Gold from India, one of the largest importing countries, is likely to fall leading to a dent in the gold demand and consequently its price.
- Government initiatives to impact demand for gold - The gold monetization scheme of the current government (if it succeeds), where they plan to recycle existing private holding of gold, will cut India's gold imports substantially. This will impact gold prices even more.
- Indian household savings moving away from gold to Financial instruments - The demand for gold is expected to reduce as households are moving away from physical investment to financial instruments like Fixed deposits, Bonds, Equity, etc. on the backdrop of improved economic growth and negative returns by gold in last 3 years. The savings in financial instruments have increased from roughly 35% to upwards of 40% in the last 2 years.
Globally, economies' in deflationary zone: Gold is popularly perceived as a hedge against inflation. But most global economies are in a deflationary mode and the possibility of bringing in inflation in the coming few months is remote. Therefore, the desire to hold gold is expected to be subdued.