gold price analysis: Is it time to book profit in gold?

Mumbai: Amid an impressive run for gold, investors are asking if the precious metal is a wealth creator and not merely a safe-haven asset? In the past three years, gold has fetched a 17% annualised return, compared to 11.5% by the Sensex.

Today, gold appears to have the edge over equities across both near-term and long-term horizons. But this comparison is coming when gold is scaling fresh peaks, even as equities have lost steam, observes Niranjan Avasthi, SVP, Edelweiss Asset Management.

However, experts believe that the outperformance may peter out soon. Chirag Mehta, CIO, Quantum AMC, reckons “multiple diplomatic talks currently underway may pave the way for a more stable international climate. Furthermore, inflation appears to be well-contained.” A strong dollar and low visibility of further interest rate cuts by the US Fed will also keep a lid on gold prices, indicates Ventura Securities in a note.

Experts also point out that gold’s near-term risk-return payoff is not in its favour. If past price behaviour of gold is any indicator, it appears to be overbought. For instance, a analysis of gold prices since the 1970s reveals that the current divergence between gold’s price and its 200-day moving average is unusually large. This pattern has invariably signalled the onset of prolonged weakness in gold prices, following periods of superlative gains.

Avasthi says that gold might be overvalued than equity at present. An analysis of Sensex-to gold ratio since 1999 shows that when this ratio is below 1, equities can outperform in the following three years, and when this ratio is above 1, gold can outperform equities over the next three years. The current ratio is below long term average of 0.96. This means gold is slightly overvalued and “equities may outpace gold in the next three years,” says Avasthi. Historical patterns suggest that like equities, gold also goes through cycles. For every phase of superlative gains, there have been extended periods of underperformance. In fact, whenever gold has witnessed a slump, it has been rather painful for investors. Gold has fallen more than 30% on three occasions since 1980, indicate data from FundsIndia. Moreover, there have been extended periods when gold has yielded no return.

For instance, gold took 10 years to reach its peak of 1980 again. It took the precious metal 7 years to regain its 2012 peak. Experts maintain that gold’s long-term allure remains intact amid currency debasement and global economic instability. However, one should not extrapolate recent gains into the future. Do not over-allocate to gold. “A prudent allocation of 15-20% can provide the right balance of stability and growth,” asserts Krishan Mishra, CEO, FPSB India.