Will gold rebound from here?

With prices slipping 25% in the international market, it is time to reduce your exposure

At the height of the gold boom, mining companies were raising production, opening new mines and adding employees. But with gold prices plunging since last year, they have been shutting mines and focusing on cost reduction.

With gold prices currently at $1,250/oz-levels in the international market, should Indians hold on to their gold or sell it?

Now, the average cost of gold production now is about $1,100 an ounce, according to international ratings agency Moody’s, resulting in lower margins and, in case of mines with low-grade ore, even negative margins. Gold prices have slipped 25 per cent from $1,655/oz a year ago. As a result, many gold mining companies are cutting production and some are shutting unviable mines.

  While miners cut production, demand has fallen, as exchange-traded funds have been unwinding their positions. These had cut holdings 119 tonnes in the quarter ended September 2013, according to a World Gold Council report. Consumer demand for gold, however, increased five per cent to 496 tonnes in the same quarter.

Experts feel in the short term, gold prices are expected to remain range-bound, despite production cuts. Lakshmi Iyer, head of products and fixed income, Kotak Mutual Fund, says: “Production cuts will not have an immediate impact on gold prices or provide support, as it takes a long time for the trickle-down effect. But yes, in the long run, these will help stabilise gold prices.”

In India, gold consumption fell after the government raised taxes on import of the commodity. The Centre wants to reduce gold consumption to 800 tonnes this financial year from the 845 tonnes in 2012-13. Also, with the US Fed signalling a cut in its bond-buying programme, gold prices have been falling for some time.

But domestic gold prices have held up, as the falling rupee has been instrumental in boosting returns of gold investors in the country. In rupee terms, gold prices have fallen a mere 0.5 per cent to Rs 30,200/10g for standard Indian gold.  Iyer says, “We don’t expect any major triggers in gold prices. You might see some uptick in gold prices due to the emerging market currency turmoil, but these are expected to remain range-bound in the coming months.”

If gold accounts for more than seven-eight per cent of your portfolio, it may be a good idea to reduce your gold holdings to about two-three per cent. Experts say fresh investment in gold should be avoided, as the commodity isn’t expected to see a rebound anytime soon.