Will gold get back its sheen?

Kavita Jajoo was once bullish on gold. “I used to invest in gold ETFs but stopped two years ago because the returns were not attractive," says the Mumbai-based accounts professional. She still holds the gold ETFs bought before gold's dramatic decline in 2013, but has no plans to increase her exposure to the yellow metal.
Like Jajoo, investors in gold have experienced a sinking feeling in the past two years.A ray of hope has been finance minister Arun Jaitley's Budget announcement of a gold monetisation scheme. However, despite that the outlook for gold is not very optimistic and there could be more pain in store.
READ ALSO:Gold skids below Rs 27,000 mark on heavy stockists selling
The key factor working against gold right now is the imminent rate hike by the US Federal Reserve. “Gold will be a bad asset class once the Fed starts hiking rates. Low inflation and rising interest rates are bad news for gold,“ says
Kishore Narne, Associate Director, Mo tilal Oswal Commodities Broker. “The dollar will rise if the US Fed hikes interest rates. So, the outlook for gold is likely to remain bearish for the next one year,“ concurs C.P. Krishnan, Wholetime Director, Geojit Comtrade.
However, don't expect a big fall in gold either. “Gold has peaked out in dollar terms. But the geo-political situation is fast changing,“ says Jayant Manglik, President, Retail Distribution, Religare Securities. The rise in the dollar may also provide a cushion to domestic gold prices. Even if the price of gold declines in dollar terms, the weakening of the rupee will keep prices high in rupee terms.

The other negative factor is the stagnation in the demand for the yellow metal. India and China are the largest consumers of gold in the world. Both witnessed a drop in demand in 2014 (see chart). “There has been no increase in the demand for gold in the past few years,“ says Hasmukh Bafna, President, Gold Chains & Jewellery Wholesalers Welfare Association. In India, this can be attributed to the quantitative restrictions slapped by the government on gold imports.
There are other reasons too. Last year, the Budget had made it mandatory to show the PAN for gold purchases of over Rs 2 lakh. This year's Budget has reduced the threshold limit to Rs 1 lakh. This could badly hit demand for gold. Widespread agricultural losses due to unseasonal rains could further dampen the demand for the metal.
Industry players are putting up a brave face. “There is not much impact due to the PAN restrictions,“ says Prithviraj Kothari, vice president, India Bullion and Jewellers Association. The World Gold Council too continues to project a rosy picture. “The Indian and Chinese demand estimates for 2015 are 9001,000 tonnes and there is no need to change that estimate,“ says P R Somasundaram, MD-India, World Gold Council.
Reversal in investment demand
Globally, investors and speculators have started deserting gold. The total gold holdings of SPDR Gold Trust, the largest gold ETF in the world, have declined 42% in the past three years. A similar trend has been seen in Indian gold ETFs in the past two years. Their gold holdings have slipped 36% from 39 tonnes to 25 tonnes (see chart).
Similarly, the demand for gold bars and coins has come down, indicating investors are no longer bullish on gold.
Should you buy now?
Buying gold right now may not be a wise decision. A staggered approach is the best way to buy the metal. Adding 10-20 grams every year makes sense.Analysts expect gold to drop 10% to around $1,080 per ounce by December 2015. Domestic gold prices have not followed the global downtrend because of the 10% import duty . If this duty is removed by the government, domestic gold will crash. "The 10% import duty on gold is high and must go. We expect some reduction in the July-September quarter if the rupee remains stable," says Somasundaram.
This means gold will see an intermediate bottom by the end of 2015. “End of this year or beginning of next year should be a good time to buy gold. So the long-term gold investors should wait till then and divert a portion of their equity and debt portfolio to gold later," says Narne.
READ ALSO:Gold extends losses on global cues; Silver stages recovery
How much gold should you buy
Gold is a liquid investment that can be sold anytime. It is also a hedge against inflation and a diversification tool.“Gold should continue to be part of one's portfolio,“ advises Manglik. Experts suggest that one should have at least 5% and not more than 15% of your portfolio in gold. The best way to buy the metal is by adding small quantities when prices are down.
The problem with jewellery is the purity and making charges. If the purity of an ornament is suspect, it will not fetch a good price when you sell it.It is best to buy hallmarked jewellery. Hallmarking pushes up the price marginally but the resale value of the jewellery is higher. Even gold bars and coins are hallmarked.