Gold In 2014: Not All Glitter

Gold has traditionally been a haven for Indians to park their savings. Over the past year, however, investors in gold must have seen a depreciation in their assets’ worth.

Gold prices in the international markets came down drastically from USD 1700 per ounce to USD 1200 per ounce, shedding investors' worth by more than 28% over this period. The international markets are expecting gold prices to drop to further lower levels. The global equity markets are trading at their all-time highs and expected to remain at higher levels in CY2014 also, and investors may withdraw their monies from safer assets like gold and opt for equity. Further, US tapering is scheduled to start in the next year and the expected tight liquidity positions across the globe will pull down investment in precious metals such as gold.

Despite the considerable deterioration in international global prices, the domestic gold prices are only marginally down. Currency depreciation and the government's hike in gold import duty provided the cushion for Indian investors. Last year, the government increased the gold import duty from 2% to 10%. A further reason was the Reserve Bank's 20:80 scheme, which demands that at least 20% imports need to be re-exported. Today, gold prices have dipped by more than 4% from Rs 30473 per 10 grams a year ago to Rs 29095 per 10 gram.

However, this kind of cushion may not be expected in CY2014. As the economy starts improving, the currency also starts strengthening against the other global currencies (including the USD). Further, the Indian government is expected to roll back some of the harsh measure taken in CY2013 such as the hike in gold import duty.

In fact, international gold prices are also expected to come down further in CY2014. This is clear from the drastic reduction in assets under management (AUM) of major global gold ETFs, which are at their lowest levels in the recent past. Moreover, some of the global hedge fund managers have also lowered their exposure in gold and silver. China's net imports from Hong Kong were down by 42% in November 2013, indicating lower demand for the metal in the country, which is the largest consumer of the yellow metal.

We, at Dalal Street Investment Journal, also anticipate that gold will lose its shine drastically for domestic investors in CY2014. Hence, we advise cutting down on exposure to this glittering asset in CY2014.