Gold touches 7-month high; should you still buy?

IF you take a look at gold prices in the past few months, they have been moving in just one direction-- upwards. From Rs 10, 650 for 10 grams last January 2008, the price has moved to Rs 15,490 today. Gold price is at a seven month high and is up by 10% since January this year. The World Gold Council reports that global demand was up by 4 per cent in 2008.

A quick look at the prices in the last few days:

20 February, 2009	Rs 15490
19 February, 2009	Rs 15800
18 February, 2009	Rs 15750
17 February, 2009	Rs 15255

What are the reasons for this outperformance?

The spurt in prices could be attributed to following reasons.

Weak equity markets

The volatility and instability in the stock market has boosted investor’s sentiments to move towards gold as an investment. Gold has been viewed to give steady and assured returns and hence investors move from choppy market to save haven like gold. Analysts say that people are rather bullish on gold, due to which gold prices have been rallying for a while now where Sensex is down 45% during same time.

Depreciating rupee

In simple words, when rupee depreciates, gold price increases. The international price of gold depends on the strength of dollar. When dollar weakens, gold prices shoot ups and vice versa.

Central bank buying

The monetary policies issued by the Reserve Bank of India influences the investors actions, which in turn affects the investors decision to invest in gold or any other asset class.

Global economic crisis

There are reports of several governments like the Chinese; Russian who are diversifying their reserves into gold which is giving additional momentum to gold demand that is apart from the investment demands through gold exchange traded funds or gold ETF.

So, should you buy now or hold on?

For traders

At this level, it would be wise to sell as you can clock in decent profit. Buying at this level is going to be an expensive deal, says Naveen Mathur, Head of Commodities, Angel Commodities. The past few days have seen very volatile sessions in gold prices internationally and Indian markets because of the rupee depreciation. The prices may shoot up a bit more before going through price correction.

Raghavan Sundarajan of Kotak Commodities confirms the same. He says it’s a good time to rake in some profit if you consider selling at this level.

For common investors

“Ideally, an investor should have 15-20 per cent allocation in gold. If you have more than 20 per cent you can consider selling and if you think you allocation is not enough, it’s time to buy and balance your portfolio”, says Sandeep Shanbhag, Director Wonderland Investments. Just because an asset class is performing exceedingly well, it doesn’t mean you park all of your money in that asset. There always has to be a balanced exposure to each asset class, advises Shanbhag.

Apart from physical gold you can also consider investing via gold ETF. These are function like a mutual fund scheme that invests in gold and is held in paper or dematerialized form, just like stocks.

Some gold ETFs and their absolute returns over the last one year:

Mutual fund	1 month (%)	3 month (%)	6 month (%)	1 year (%)
Benchmark Gold BeES	18.5	28.5	36.7	29.3
Kotak Gold ETF	18.5	28.4	36.6	29.2
UTI Gold Exchange Traded Fund	18.4	28.3	36.6	29.2
Reliance Gold ETF	18.2	28.0	35.3	27.2
Quantum Gold Fund	18.4	28.2	36.7	26.1