11 Jun, 2014

Has the Gold lost its tag of Safe Haven?

Gold prices globally fell by over 28% in year 2013. Such a fall has been seen after three decades.  So questions are arising on its safe haven tag. US initiated tapering in bond buying and talks of increasing interest rate in 2015 by Fed are the major reasons of the fall in gold & has also decreased the interest in gold investments. Investors are preferring equities as compared to gold right now. The strong US economic data is further adding downward pressure on gold. Only positive news for gold investors right now is Ukraine crisis.

To understand the pricing behavior of gold in India we should be aware of that price of gold is decided by global markets, not India. So, gold price in India depends majorly on two factors i.e. global gold price movement and the way Indian currency moves as compared to US dollar.

Gold lost its tag of Safe Haven

In India, we didn’t see huge fall in gold last year just because Indian currency depreciated against US dollar substantially, but in 2014 we witnessed crash in gold prices in India. Its because rupee has gained its strength back against US dollar as USD-INR is trading at 59 compared to 68 which it hit in August last year. So price of gold in India has gone down majorly because of currency movement even if global prices haven’t come down much.

The prominent question to ask moving forward is that which will be the different factors that will affect the gold prices & which direction will it follow. Major global factors will be the US economy, China slowdown & Ukraine crisis and domestic factor will be of currency. US economy is improving since last few quarters which resulted bond tapering & increases the chances to increase in deposit rates after tapering ends from current level of zero percent. Due to all these reasons equities markets are rising and yield in US bonds have also increased. It is decreasing investors’ interest in gold.

Even the demand has slowed down in China which is the biggest consumer of gold. It will again remain a concern for gold in coming period. Ukraine crisis is only positive news for gold but as talks for peace will take some shape, it will not remain an issue after year or so.

Indian currency has stabilized after elections. As policy actions will start and find some pace, Indian economy will recover. Even today India is considered to be best placed among developing markets due to which foreign flows are coming to India. It will result in stronger Indian currency and may add pressure to gold prices. Looking at all these factors it will not be wrong to say that Gold has lost its safe haven tag for the time being till we don’t see any major threat to world economy and peace.

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