My ROI target for any investment is min 15% per annum over long term.
If I do not see that happening, then I would not invest.
So,I will invest in Gold only if I believe it will give a 15% price appreciation per annum over the next few years.
So how do I forecast the price of gold?
Gold price in India is impacted by two factors –
• the global price of gold in USD and
• the USD / INR conversion rate.
The global price of gold has been in the range of $1300 per ounce since 2013.
The global price is determined by
• the global economic conditions,
• the global demand supply and
• liquidity policies of the central banks in US, EU and other major economies.
The global economic conditions are as of now on an upward trajectory. US economy is starting to grow at 2% plus. Europe and Japan are fragile but there is optimism. China and India are growing. The general optimism will mean that the investor money will move towards more risk assets – stock markets is where global money is flowing and the demand for gold will be subdued as long as the general optimism prevails. Hence the global price of gold in the future will be range bound around $1300 per ounce.
The second factor determining the gold prices in India is the USD /INR conversion ratio.
Basic economics helps us in forecasting the trend of the USD /INR conversion ratio.
A simple formula for predicting the annual rate of devaluation of the Indian rupee vis a vis the US Dollar is:
The annual rupee devaluation vis a vis US dollar = (Indian inflation rate) – (US inflation rate).
Using this formula, one can predict the USD /INR rate in the long term.
In the coming years, it is expected that the US will have an inflation of 2% and the India will have an inflation of 5%. Hence the annual rupee devaluation will be around 3%.
Which means that if 1USD = INR 65 now, then after one year, it will be 1 USD = INR 65*1.03 = INR 66.95.
This will mean that the price of gold in India will go up by 3% per annum.
So with global prices of gold being range bound and USD/INR conversion giving a 3% price increase per year – overall, I do not foresee a 15% price appreciation in gold in the coming years.
Hence, I would not be investing in goldat this point of time.
If there is some event that creates a fear of global economic slowdown, like what happened in 2008, then I would surely rush to invest in gold.