Should you buy gold now given that prices have risen a lot? What is the forecast for gold prices?


Over the last one year, gold prices have risen by 22.22% (data as on 4th Oct 2019). The chart below shows the rising gold prices over the last one year.

A good portfolio approach is to have 5% to 10% of one’s portfolio always in gold. That is the advice we give to anybody who asks us. However, the gold prices have gone up a lot in last few months and some of our friends have asked us if they should buy gold now or should they wait for prices to decline. This post is written for them and for all of you who wonder when is a good time to buy gold.

Let’s first understand how gold prices are determined in India. The gold prices are fixed in USD (Read more here) every day and the spot and future rates vary across different exchanges across the world on basis of demand and supply. Now to arrive at the gold price in India you have to multiply the gold price in USD and add 12.50% duty on it. The formula to arrive at the gold prices in Indian Rupees (without GST) looks something like this

The price of gold is largely determined by global and macro-economic conditions and sentiments. The Rupee to dollar exchange rate also plays an important role(more on this later).

If the global conditions are the largest factor in determining gold prices then what does global conditions forecast? A Citibank report has forecasted gold prices to reach $2,000 per troy ounce in the next two years. You can read the Bloomberg report on this here

One of the big reason cited for the gold prices to rise is that the Federal Reserve might cut the U.S interest rates to zero. So what is the likelihood of that happening? Very likely. Interest rates have been declining in developed economies for a long time. In many countries in Europe the interest rate is negative. See the chart below which shows the interest rates falling through the floor

The yields on 10-year government bonds for countries like Sweden, Japan, Denmark, Germany and Switzerland is already negative or close to zero. Trump has been pushing the Federal Reserve to cut the U.S interest rate to zero. See Trump’s tweet on this below

If U.S interest rates go down to zero then gold prices will most likely hit USD 2,000 per troy ounce.

Now let’s look at the second variable which is the Rupee to Dollar exchange rate. The India Rupee has been depreciating for last several years. Today 1 USD is equivalent to Rs 70.84. We all know that Rupee is not one of the strongest performing currencies. The chart below shows the performance of Rupee last year against other currencies in the world. The Indian currency declined by 9.5% against the USD. The India Rupee did only slightly better than currencies from South Africa, Brazil, Russia and Turkey.

When we talk to friends who understand the currency business they tell us that Rupee may depreciate further next year. In informal chats they have indicated that Rupee might depreciate another 10% to 12% by next year. If that happens then the exchange rate for 1 USD will most likely be Rs 80. So what will be the gold price in India if gold rate is USD 2,000 per ounce and Rupee to Dollar exchange rate is 80 and duty remains at 12.50%? The table below shows the forecasted rate for gold per gram in Rupees if that happens

That is 55% increase from the current gold prices. No wonder Central Banks all over the world are buying large quantities of gold. See the chart below that shows that Central Banks have been large buyers of gold since 2010

What is good for Central Banks must be good for you too. There has never been a better time to own gold. Make sure 5% to 10% of your portfolio is in gold.

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