Gold down 15-20% from peak. Is it time to buy gold?

Gold did pretty well in 2020 with more than 25% returns. The pandemic of 2020 caused severe economic restrictions across the world that created doubts about the future (of life as we knew it) in the minds of investors.

A large number of investors dumped riskier assets like equities and diverted their money towards gold (a historically reliable safe haven for money) due to the rise in economic uncertainty. Hence gold delivered some solid returns in 2020.

Gold prices touched an all-time high world over and in India too, it touched Rs 56-58,000 per 10 grams of gold just a few months back.

But after that, a correction of sorts has begun in gold prices. As of now, the prices are down around 15-20% from their recent all-time highs. The gold price chart has fallen a bit over the last few months. Even the NAVs of Gold ETFs and gold bonds in India too have adjusted downwards in line with falling gold prices the world over.

Even my wife is excited by the fall in gold prices (like she was a few years back – link)

But jokes apart, there are many reasons for this fall. Strengthening of the US dollar against major currencies. Bond yields too have risen causing some bit of correction in the gold prices. And as the lockdown ended across the world and investor’s regular risk appetite returned to normal, they have been looking for investing in riskier assets like equities and cryptocurrencies, thereby selling precious metals like gold and putting downward pressure on its price.

It won’t be wrong to say that as of now, gold isn’t exactly enjoying the safe-haven status it enjoyed last year around the peak of the pandemic.

So does it mean that the rally in gold prices has come to an end? Or it will rebound again very soon? And where are gold prices headed from the current levels? Or what are the new gold price target?

To be honest, I don’t know. I am not the one to give a gold price forecast. And to be honest, I am better off not predicting something like gold price target that is known to prove experts wrong time and again. But that doesn’t mean that we cannot think about the situation prudently and then make our investment decisions.

But before deciding to invest (more) in gold, the investors need to understand something about gold and its historical behaviour.

Gold is unlike stocks or bonds. It has no intrinsic value or cash flows that you can evaluate. So the concept of valuation isn’t exactly applicable here. And the gold prices are more about the demand-supply equation at any point in time and factors affecting this equation (like financial crisis, geo-political issues, etc.). As a result, the price of gold has a typical pattern. And this pattern is occasionally accompanied by high volatility. Gold has got a bad name for giving lumpy returns. That is, gold prices don’t do much for years but suddenly out of the blue and after years of dormancy, it gives great returns.

This occasional spurt in returns is what pushes up the long-term averages (read an interesting take on averages here).

So, for a lack of a better word, and like equity investing, even gold has a timing angle to it. That means that if you want to time gold investments, do note that it’s about accumulating it during the period in which it hasn’t been giving great returns.

All said and done, the main question is that what can you do as gold prices have fallen now?

This question itself demands another question – How much Gold to hold in long term Portfolio?

Sadly, there is no one right answer here. But having some exposure to gold (from 5-15%) in your long term portfolio is the way to go for most common investors.

It’s worth mentioning that gold is more of a diversifier in your portfolio and a kind of hedge. It generally shouldn’t be the core of the portfolio like debt or equity (unless you are a professional investor/trader).

I would suggest not trying to buy a lot of gold (via SGB and/or ETFs) in one go. It’s best to spread your investments in gold. And since both gold SGBs and gold ETFs have their advantages and disadvantages, it makes sense to gradually use both for your long-term investments.

That is, investors can hold a combination of SGBs and gold ETFs. How? You can use purchase SGBs occasionally when new series are announced and you have funds available to invest. This can be augmented by purchasing gold ETFs when there are temporary short-term corrections in gold prices. You can even buy an older gold bond series from the secondary markets if sufficient volumes are available.

When it comes to choosing between physical gold, Sovereign Gold Bonds or Gold ETFs, it depends on your requirements. I can safely say that Gold bonds and ETFs are far better than owning physical gold from a non-consumption and investment perspective. There are many other reasons too why one should invest in bonds and ETFs instead of physical gold.

There are a few difference in Gold Bonds Vs Gold ETFs. When it comes to returns, Bonds do better due to the additional 2.5% interest that they offer over and above the possible appreciation on gold prices. Also, there is no taxation of gains at maturity for the bonds. But from a liquidity perspective and if you do not wish to hold the gold for several years, gold ETFs are more suitable. You can read more about these gold instruments here at Gold FAQs. And if you want, you can also read about how gains from gold are taxed.

The golds bonds are issued several times a year by the RBI in different tranches that are priced at different levels – based on the simple average closing price (published by the India Bullion and Jewellers Association Ltd or IBJA) for gold of 999 purity of the last three working days of the week preceding the subscription period. To know more about the historical issue prices of these bonds since the start of SGB gold bonds in 2015, please refer to the detailed post titled Gold Bond Issue Price History (Since 2015).

Now you may ask that which amongst the two, i.e. Sovereign gold bonds or ETFs is better for gold investment? Here are a few thoughts:

  • If you are planning to use gold as a tactical part of your portfolio that you will regularly buy and sell, then you need to value liquidity more. And hence, investing in gold ETF is better.
  • If you plan to hold a large corpus in gold for the short term, then having it in SGB will mean that you will need large volumes on exchanges to exit your positions. But that is not feasible currently due to poor volumes of various SGB series of stock exchanges.
  • But if you are investing in the long term and are sure that you won’t need to exit before 8 years or so, then SGB may be a better option.
  • Or a combination of SGBs and ETFs can be taken to gradually build up allocation to gold in your long term portfolio. This will provide a good balance of liquidity (via ETFs) and higher returns (via SGBs).
  • There is another option for investing in gold – Gold Funds. These are simply mutual funds that invest in gold ETFs. So it’s a way of taking exposure to gold ETFs without buying the directly or via a Demat account. But it carries an extra layer of costs towards management fees that reduces returns a bit when compared to gold ETFs.

If you were planning to buy gold in 2021 or wanted to invest in gold in 2021, then this sharp gold price correction 2020 gold price correction 2021 India has indeed opened a window of opportunity for investors. Without worrying too much about the daily gold price today or about gold price forecast, do this simple thing – If you have an allocation to gold that is lower than what is ideal for your portfolio, then you can use this as an opportunity to add more gold to your long-term portfolio. Or if you are an investor who till now was waiting and sitting on the fence, then again this price fall might be a good opportunity or entry point to begin accumulating gold now.

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