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Gold investment: gilt edge, but great yields unlikely

After the bull run of 2011, when prices rose as much as 40%, gold as an investment instrument seems to have lost some sheen. HT reports. Pinching profits

business Updated: Aug 15, 2012 21:18 IST
HT Correspondents

After the bull run of 2011, when prices rose as much as 40%, gold as an investment instrument seems to have lost some sheen.

"The demand of gold has come down in absolute term in 2012 compared to a year earlier but in value term it is up by around 35%," said Hitesh Jain, commodity analyst, IIFL. "So while investors may not get 40% returns that they did in 2011, they still would get around

10% returns. Moreover, gold is not just a commodity but an alternate currency."

Industry experts say that gold prices may stagnate at around Rs. 30,000 per 10 grams or rise by 7-10%.

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"Due to economic turmoil many investors would look at gold from a 'wealth preservation' perspective. Diversification of reserves and investment into gold seems to be the course of action, thereby supporting gold prices," said Chirag Mehta, fund manager, Quantum gold savings fund and quantum gold ETF.

In the first three months of the year total gold demand was down by 29% to 207.6 tonnes according to the World Gold Council (WCG).

So should one buy gold for investment? "Investors are not getting good returns in either capital market or any other investment vehicle, and gold comes across as the safest investment," said Jain.

There is concern the demand for gold in the second half of the year may dip due to the weak monsoon.

Rural areas, which contribute around 60% of the total demand in India, depend on monsoon rains for agricultural yields and income.

Globally, central banks have been buying more gold. While in 2010 central banks were net buyers at 80 tonnes, they were net buyers at 411 tonnes in 2011. But in 2011 in the first three months central banks have already bought 80 tonnes.

In June, the finance secretary said India's gold imports in April-May were down by 6.2 bn from 2011.

According to the WGC, gold jewellery demand dipped 19% year-on-year in January-March 2012, and investment demand by 46%, on the back of a weak Indian currency. Globally the gold demand was down was down by 5% in April-June, according to the WGC though local prices jumped by 35% in the same period.

Industry experts say gold imports have dropped to around 350 tonnes in the first half of the year compared to around 553 tonnes in the same period in 2011.