Follow Rakesh Jhunjhunwala? Should you follow RBI too for buying Gold

Whenever big-bull Rakesh Jhunjhunwala buys a stock, investors are quick to follow him and, as a result, there is a jump in the price of that stock. But should you take the same stance when the Reserve Bank of India buys an asset? Well, that is a question doing the rounds these days.

The RBI has bought 8.46 tonnes of gold in the financial year 2017-18, the first purchase of yellow metal by the apex bank in almost nine years. Last time the RBI purchased gold was in November 2009, when it had bought 200 tonnes of yellow metal from the International Monetary Fund (IMF). DNA Money spoke to economists, wealth managers, rating specialists, and gold firms to understand what investors should do with gold, which has hardly moved in the last five years.

Gold is historically an asset class that does well during turbulent financial markets. As a safe-haven, the precious metal attracts risk-averse investors during such times. But when markets are doing fine, gold moves in a range, giving no gain for long periods of time.

Outlook for gold price
According to Value Research data, the domestic price of gold moved up by just 1.44% in the last 12 months. Over a five-year period, gold price has virtually not moved an inch. These are times when stock markets have done very well. But with persistent talk about global trade wars and currencies dropping against the dollar, is it time to go for gold?

Case for buying gold
Morgan Stanley in its cross-asset playbook for key themes into year-end has made a ‘buy’ case for gold. “We think that this is a good entry point to add gold exposure on our cautious risk outlook, expectations of lower US real yields and a weaker US dollar. Tentative signs of better physical demand, the approaching peak jewellery season in India and mine suspensions should bring improvement in fundamentals,” said Morgan Stanley, adding that risk may be in form of the dollar rally that continues and pressures gold lower.

Indian economists say that investors should understand the rationale for RBI’s gold purchase. “To an extent, diversification of foreign exchange reserves warrants some amount of holding in gold. However, the trade-off is that gold does not provide a return, unlike interest earned on investments in foreign exchange denominated securities, while all such assets are subject to volatility in asset values,” said Aditi Nayar, principal economist, ICRA.

Wealth managers agree. According to Rahul Jain, head, Edelweiss Personal Wealth Advisory people should take the RBI’s gold purchase as a sign to buy. “The gold purchase by the central bank must have been done to readjust the foreign exchange reserves. On gold outlook, we think prices will move between Rs 28,000 to Rs 32,000 (per 10 gms) for the next six months.” At present, gold prices trade in the Rs 31,200-31,300 band. Globally, gold prices are near $1,200 an ounce (in New York).

Whatever be India’s macro position, some experts are of the opinion that RBI’s gold buy could indicate volatile times ahead. V P Nandakumar, MD & CEO, Manappuram Finance said: “The RBI’s gold purchase seems to indicate expectations of greater volatility in the international market going ahead; hence the need to hedge against it with a ‘safe haven’ asset like gold. Retail investors will be guided by expectations about where the Indian financial markets are headed.”

Given the global inter-linkages, and the recent pressures faced by emerging markets in general (including currency depreciation), it is likely that India too may face a period of volatility and market corrections, Nandakumar argued. Retail investors would do well to give more thought to gold in the coming months, he advised.

According to Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC, falling gold prices in the absence of rising real yields indicate that gold has cheapened relative to other US-dominated flight-to-quality assets, like TIPS and Treasuries. “With prices falling for five straight months, there has been a record short build up in gold. The possibility of a short-covering rally in the coming months is seen on expectations of the dollar depreciation amid rising inflation, economic growth peaking and increasing geopolitical uncertainty. Investors’ tolerance for economic uncertainty is rising, and at some point that risk may come back to bite them, which will act as a positive trigger for gold,” he said.

RBI’s purchase is nominal
However, some experts do not think RBI’s latest gold purchase is a big enough bet for investors to take notice. Suman Chowdhury, president - ratings, Acuit  Ratings and Research said the quantum of gold purchase by RBI at 8.4 metric tonnes in 2017-18 is not significant in the context of total gold reserves of 566.2 tonnes held by RBI as on June 2018. This is also a nominal amount against the last gold purchase by RBI of 200 tonnes in November 2009.

“Physical gold comprises only 3.98% of the gross assets in RBI’s balance sheet and that has remained largely unchanged from the previous year. Therefore, there is no material inference that one can draw from this gold purchase,” he said.

While there are a few who think the dollar’s about 12% rise (YTD) against the rupee is a sign of bad times, which by extension is a good sign for gold bugs,  Chowdhury disagreed. “We don’t believe that there is any reason to panic from the current rupee depreciation and also the nominal gold purchase by RBI. India’s rupee is overvalued against the major global currencies and a partial correction would be beneficial for our export competitiveness and our trade balance,” he said.

Apart from buying physical gold, investors, these days take positions through gold exchange-traded funds (ETFs) and interest-paying sovereign gold bonds. As per AMFI data, investor assets worth Rs 4,445 crore are present in 12 gold ETFs. Gold ETFs have seen net outflows of Rs 241 crore in five months this fiscal year, compared to Rs 314 crore in the same period, last fiscal.

Source: DNA Money