Investing in gold? Rising dollar to dampen your short-term return

Analysts continue to bet on the yellow metal for the long-term based on geopolitical tensions

A rising dollar is set to limit the return on gold investment in the near-term, despite geopolitical tensions rising abroad. 

With the US Federal Reserve expected to raise interest rates again next month, the dollar might continue to fetch better returns than other asset classes, including gold and silver, in the near-term. 

In India, with the southwest monsoon expected to turn weaker than previously estimated for the current season, resulting in a decline in Kharif crop output, the country's gold demand is likely to remain slow this year. 

As a consequence, investors are betting on gold as a long-term investment avenue, without looking to make money in the near-term. Gold's price was near its recent bottom last week but got momentous support after the US announced its monthly non-farm employment data rise at 157,000 for July, against the expectation of 190,000.

"Safe-haven demand, which generally moves gold prices higher, is not clearly visible this time, despite bigger US-China tension and geopolitical instability between the US and Iran. Gold generally moves in the opposite direction to the dollar index but it was a momentum move, as it's difficult to be bullish on gold in the near-term, once the dollar and equity markets continue to dominate investor interest," said Abhishek Bansal, chairman, Abans Group.

The dollar has risen up to 29 per cent this calendar year against other major currencies. Against the rupee, it has risen about 7.3 per cent between January and the first week of August. The rupee closed on Monday at 68.89, against 63.87 for a dollar on January 1.

The gold price in dollar terms at the London bullion market is down 7.3 per cent so far this calendar year, to close on Monday at $1,207.5 an oz, as against $1,303.1 an oz early this year. The depreciating rupee, however, held standard gold up by 0.9 per cent to close at Rs 29,495 per 10g at Mumbai's Zaveri Bazaar on Monday, from Rs 29,240 per 10g early this year.  

Following gold, the price of silver fell 9.7 per cent in the international market to trade at $15.3 an oz on Monday, against $16.9 an oz early this year. In the local currency, however, silver fell only 1.8 per cent to close on Monday at Rs 37,720 a kg, from Rs 38,425 a kg on January 1. 

"Rupee gold prices rallied by 4.3 per cent in the first three months of the calendar year and retraced right back over the next three months. This was due to the usual suspects -- a stronger dollar and increasing US Fed rates. In the longer term, however, gold in India will remain a reasonable investment. Increasing trade disagreements between the US and other countries, combined with rising global inflation, will help gold prices in dollars to firm up. Rupee prices of gold are dictated more by the exchange rate than anything else and an average annual return of about six per cent is the most likely situation over the next several years," said Jayant Manglik, president, Religare Securities. 

Gnanasekar Thiagarajan, director, Commtrendz, suggested that investors take a long-term bet on gold due to fear of a supply shortage in the coming years. 

"Leading gold mining companies have reported a decline in their production due to rising cost and stable realisation, which they find uneconomical. Since the discovery of new mines takes years, it is impossible to add new production capacity in the foreseeable future. Therefore, investors should keep investing regularly in gold," he explained. 

In its April-June quarter report, the World Gold Council posted global demand at 1,959.9 tonnes for the period between January and June. It reported a four per cent (at 964.4 tonnes) and eight per cent (at 187.2 tonnes) decline in gold demand during the quarter for the world and India, respectively.