Is this the right time to invest in GOLD in India ?

Is this the right time to invest in GOLD ?

As far as investment in gold is there I would like to sight Warren Buffet, who said, "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it”

Since the new government the gold prices have declined, and the question which we face right now is the price low enough? Some things which we need to consider while answering this question are 1.Hedge against Inflation 2.Derecognizing gold as a reserve 3.Ever growing Sensex & the correlation 4.Import Laws and 5.Gold Monetization.

Gold since historical times has been hedged against inflation. But in the current global scenario where the governments are trying their level best to create a greater demand for real goods, there does not exist a need to hedge gold against inflation. Moreover with global commodity prices coming down (crude, agriculture products, steel), inflation is moving in the backward direction and hence very remote chances that inflation would rise in the future subsequently no hedging would be required.

Banks when operating have to keep a certain amount of reserve currency and central banks around the world have recognized gold as a secure reserve, which can be monetized easily. But recently the debate over gold not being recognized as secured reserve, especially in the European nations can cause a lot of changes. As banks will have no incentive to keep it in their vaults this will cause a rapid boost to the supply of Gold. 

  

Traditionally we have seen a big correlation between the Indian stock market and the gold prices, but that was till the early 2000’s. Post that we have seen both the commodities to rise and sink together. The theory, which supported this correlation earlier was that, the Indian investor would invest either in gold or stocks and hence when investment in gold increases the gold prices soar and markets crash and vice versa (this is shown in the graph below). But in the modern day this theory fails as the increased number of FII’s that invest in the Indian Market. But even with the increased FII’s investing in India I support the traditional theory as I feel the increased FII’s have a domino effect on the Indian investors also. This causes an increased transfer of funds from gold to the stock market. With the Indian market creating new peaks, I feel it is not the right time yet to purchase the precious “ Yellow Metal ”

The Indian government has made import laws strict to curb the import of gold, they want to reduce the amount of gold you carry with you when travelling to India from outside. The government recognizes that purchase of gold takes place through large cash transactions, which means a lot of unaccountable money. The government who intends to reduce the cash economy, Gold does not fit well in their plan forward. 

The government wants to curb the import of gold as it is the second biggest source of deficit to the country and hence it has come up with the gold monetization scheme. The gold monetization scheme would make use of the tradition gold stocks in the Indian lockers and the temples of India. The scheme aims at making that gold kept in the locker to give the owner a source of income and in turn satisfy the demand of a few gold buyers. This essentially prevents us from importing gold from outside. This scheme has been rolled out but not yet in action. The government is working day and night with banks towards this scheme and once this scheme come into actual working, it will cause the gold supply to surge with mostly a constant demand. This can be a factor, which would cause the gold prices to reduce further.

Hence I would like to conclude that as per my opinion Gold does not seem as a viable long-term investment option going ahead and looking at the current Indian scenario. But the factors mentioned above could also backfire so an investor should act on his own judgments whether to go ahead with the investment or not.