STOCK VS GOLD: TIME TO LOG INTO BOURSES?

After so many flip-flops over the last couple of months, at last the commodity that is considered safe haven investment is now running for its own safety cover. Though many experts had been predicting a sharp fall in the yellow metal since long, this phenomenon was triggered on July 20 with the announcement of less than expected gold reserve by the People’s Bank of China at 1,658 MT. This was the first update since 2009 by China’s premier bank and it clearly implies that the bank had purchased just 100 tons of gold annually. This trigger was enough to drag gold to a five-year low level of USD 1,086 per ounce, an intraday fall of a whopping 4.2 per cent.

In the domestic market, gold plunged to a five-year low level of Rs 24,904 per 10 grams owing to global sell-off pressure. Despite this sharp correction there is an interesting phenomenon that has cropped up across the globe in terms of gold investment, i.e. no investor wants to park money into gold at its current level as the assumption is that this free fall will continue during the next couple of months. On the one hand Indian investors are not amused with this fall and anticipate more southward movement while on the other there has taken off a debate about whether equity is clearly a better investment than gold in the medium to long term.

Is Gold out of the Running?

The usual logic that putting a percentage of investible money into gold as a safe haven does not seem to hold any longer. There are various reasons indicating that gold will further lose its sheen. Experts believe that owing to decent recovery of the US’ market, a rate hike by Federal Reserve is inevitable and if it happens in September or December it will certainly hurt the yellow metal in a big way. India Ratings & Research has maintained a negative outlook on domestic gold prices for FY16. “In the event of a US’ rate hike, global gold prices could drop and range between USD 900 per ounce to USD 1,050 per ounce,” the firm reported. There is always a negative correlation between USD and prices of gold and a Federal Rate hike would clearly translate into a strengthening of the dollar vis-a-vis other currencies.

So what would be the implication for India? If it happens then the Indian price of gold may plunge to as low as Rs 21,500 per 10 grams. That being the reason, despite a drastic fall during the last couple of days, no fresh buying has started in a country that actually has a great fascination for gold and consumes around 900 tons of gold every year. Another reason that makes gold even more vulnerable for a further slide is that on the global platform, even though the economic situation doesn’t seem that good, it has boldly withstood Greece’s economic crisis and other recession cues.

“If gold prices remained sober during the last couple of months despite the mammoth Greek default crisis and couldn’t attract investors’ interest, then certainly the future of gold is not that good and it will continue its southward journey,” opines Karan Vasa, AVP, Riddhi Siddhi Bullions. Interestingly, the price of gold had corrected by more than 38 per cent till March 2015 from its all-time peak of USD 1,922 per ounce in September 2011. During the last two years gold has declined from Rs 28,818 per 10 grams in July 2013 to Rs 25,248 per 10 grams currently, posting a drop of 12.4 per cent.

The recent Iran nuclear deal also worked as a double whammy for gold as with this deal all the “geopolitical concerns” related to the Middle East have been rectified and no immediate threat now looms over global economy. “This has really hit the gold prices below the belt as gold is always considered a hedge for economic certainty,” says Vasa. Also, as gold’s future journey is totally dependent upon global factors, which don’t seem that attractive, the metal doesn’t look that attractive from short to medium term in comparison to equities.

Do Equities Hold A Promise?

What is bad for gold is virtually good for equity investment. On the global front, since the crisis of Greece has been thwarted for now and Iran’s nuclear deal holds great promise not only for global economy but also for India, stock certainly seems a much better investment in short to medium-term. Experts believe that even if the US’ Federal Reserve hikes the rate of interest in September, Indian economy this time seems to be on a much better footing than in 2013, when the rupee plunged to Rs 68.85 per USD in August 2013. This time the Indian rupee will surely show its strength against the USD as forex reserves are at adequate levels. That being the reason, Indian bourses showed their strength during the last couple of weeks and nullified all the global pressures put on by the crisis of Greece.

In addition to these global factors, the biggest booster for equities remained the proactive and stable government that is committed to reforms. Since coming to power in May 2014, the Narendra Modi-led government has shown grit towards reforms and many decisions have been taken to boost the economy, including increasing the FDI limit in various strategic sectors, coal block auction, telecom airwave auction, bringing in ease of doing business, petroleum reforms, efforts to increase consumption cycle, labour reforms, etc. Due to these steps the Indian story has again become attractive and both foreign and domestic investors are putting money into the Indian bourses.

During FY15 foreign investors have parked as much as Rs 1.11 lakh crore in equities and Rs 1.66 lakh crore in debt, while till July 22, 2015 they have put in Rs 9,254 crore into Indian equities during FY16. This has really boosted the Indian equity market’s performance and since July 2013 the Sensex has risen from 19,345 to 28,182 points, posting a growth of more than 46 per cent. This happened despite the fact that the NDA government was not able to clear strategic bills like GST and those related to land acquisition, real estate reforms, etc.

With government getting more aggressive towards reforms and the Indian economy expected to grow at a brisk pace of around 7-8 per cent in the coming years, equity investment seems miles ahead in comparison to gold investment. “Even if the gold price would bottom out at some point at say around Rs 21,000-22,000, whether it will again chart a northward journey like what happened in the last 12 years seems doubtful,” says North Indian Bullion Merchant Association’s coordinator Kailash Chandra Jain. Considering this, equities would be a better option for investors in the long run also.