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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Don't buy Gold this Diwali

Be a non-conformist. Break the tradition. This Diwali don't land up at your jewellers' shop with loads of cash.

Two reasons, why I make this apparently shocking suggestion.

One, of course, is "doubtful" ability of gold to deliver "meaningful" returns over long-term. Over the last 2-3 decades, average returns from gold investment have been around 6-7% p.a. [In comparison, long term equity investors have gained around 16-17% p.a. But let's not get into equity vs gold debate. I have already discussed why Indians love gold.]

The more compelling reason, however, is the heightened risk of correction in the gold prices in the near-term. Many pointers seem to indicate this.

Last year, due to deteriorating current account deficit, Govt. had imposed many restrictions on import of gold besides increasing the customs duty on gold from 2% to 10%. Since then the deficit problem has eased considerably. Also gold imports have crashed. This gives comfort to the Govt. and it may reduce the duty. If this happens, gold prices will see an immediate drop.

Till recently, US Govt. had been pumping billions of dollars to help its economy tackle the worldwide financial crisis of 2008. With improvement in its economic scenario, there has been a cut in this monetary support. Accordingly, a lot of this cheap money that flowed to gold has stopped. As such the international gold prices have already started correcting. This would have an impact in India too.

The strengthening of the US economy has had another impact... strengthening of the US dollar. And there is strong negative co-relation between the two. Stronger the dollar, weaker is the gold. And weakening of dollar, strengthens gold. So if dollar remains strong, gold will remain weak.

The days of high inflation in India seem to be numbered. Change of guard at the RBI and Central Govt. has invigorated the Indian economy, which may see a drop in inflation and recovery in economic growth in the coming years. Initial signs of the same are already evident. If this trend intensifies, gold will lose some of its glitter.

Stronger Indian economy would attract lots of dollars both by way of FII and FDI. This should see rupee appreciating or at least not suffering much depreciation. Again, perfect conditions for gold prices to fall.

Nevertheless, in life there is no certainty, there is only probability (otherwise we all would have been crorepatis and millionaires). So one cannot totally discount the likelihood of the contrarian forces suddenly becoming more dominant. Geopolitical tensions may rise. Inflation may make a comeback. US economy may slip again. India's growth may falter. All this will make investors again rush to the apparent safety of gold... and hence the prices may instead move up.

In short, it all boils down to how much odds you give to 'price correction' vis-a-vis 'price appreciation'. I personally am betting on a dip in the gold prices. While you are free to disregard my suggestion, you may at least stick to the time-tested 7 Golden Rules to buying Gold.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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