The clash between Gold and Equities is ringing in the market once again. Some are pointing that Gold has been an outperformer over the years and its recent slide can be ignored looking at the long term prospects while some suggest that it is game over for Gold. The recent decisive moves came when the Gold markets panicked yet again along with Equities after the Federal Reserve Open Market Committee meet.
The press conference of Ben Bernanke where he gave the indication that the Quantitative Easing program of $85 billion treasury assistance in the month can be stopped by the end of 2013 brought markets on its toes. Panic selling still continues in Gold and Equity bourses and to take a call on which one to bet on in the coming days is quite tricky. We have considered few facts that you can take into account while going for one of these.
Problems of Gold:
The faith of Gold investors is dwindling:
This was not the case earlier, the fact of the matter is that Gold has been in the Bull Run from last 12 years and it was the apple of eye for investors till 2013. But after the calls of cash crunch, these investors have booked profits in Gold. Even the world’s biggest ETF fund SPDR has witnessed record decline in its holdings below 1000 tonnes. SPDR holdings have declined by more than 37 percent this year.
Indian investors have faced another sort of problem, which is the increasing cost of buying the metal. The prices were already elevated and with the rise in import duties to 8 percent and stringent norms on jewelry purchase, the matter has become all the more critical. The import of metal from illegal routes is gaining ground. However, jewelry buyers are always the sufferers as they have to deal with high costs and depreciating value of currency. Meanwhile, investors are still in profit booking spree as International prices are thrashing. This reduces the advantage of holding Gold.
Indian Rupee declines:
INR recently smelled all time low of 59.97, perilously close to the danger mark of 60. The decline in Rupee troubles the import parity of Gold thereby increasing the prices. Meanwhile, Indian current account deficit is making life of government miserable. Further, hefty curbs on Gold imports are not ruled out. Interesting fact is that Gold held on to the rope of Indian Rupee for long and remained supported even on occasions when one witnessed huge decline in COMEX prices. But this rope is slipping now as even after record lows in Rupee, Gold is hovering near one month low of Rs 26725 per 10 grams.
Is there any advantage in betting on Equities?
Indian Equities have been a difficult subject. The bourses have missed the advantage that they could have taken after the selloff in commodities. The intrinsic weakness at macro level is the cause of such lackluster performance. Compare it with US Dow Jones and you will find that the trading interest has seriously shifted to the US index and Dollar while emerging market like India is falling into the groove of its own problems. Lack of manufacturing growth, investments, higher inflation and lower Greenfield projects have made a mockery of investment cycle in India. Even the Foreign Institutional Investors (FII’s) have pulled money out of the system after decline in Rupee.
However, it is expected that it is the ideal time for investment as the consumption cycle in India is still on. The stocks are at discounted levels and investment for a period of one to two years is expected to fetch good returns considering shifting of focus of traders towards equities and away from bullions. Headline inflation has shown some sign of waning, which is good. Though GDP’s improvement is still a big question, the high interest rates in India will keep attracting the foreign players in days to come.
At this juncture, Equity markets stand as favorites and good stocks are definitely going to multiply in value in coming months. Trade in yellow metal if you find that there are some opportunities for short term but don’t invest for long. Slowdown in Chinese markets and their consumption of metals is likely to bring down demand for bullions as well. India, which has seen a terrible price depreciation of Gold this year even after decline in Rupee will see further hitches in the yellow metal when Rupee starts to rise. Three things that make us comfortable in holding the hand of stock markets are:
1. Rise of US equities that will spread the sense of belief in other markets as well.
2. China is apprehensive in buying the metals at present, due to heavy stocks.
3. Indian markets are at multi month lows and this is a time for some bottom fishing at discounted rates.
In equities, you have to be choosy in stock picking, but cherry picking is what you should do. Bernanke has made clear that he wants to get rid of QE agenda; therefore it will now be the game of fundamentals rather than investment.
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