Gold prices have corrected sharply in the last few weeks with the US Federal Reserve winding up its stimulus programme. Long-term investors can use this decline to accumulate gold with a two/three year perspective.

At $1,172/ounce, prices are down 38 per cent from their lifetime high. Indian investors can start an SIP (systematic investment plan) in gold exchange traded funds (ETFs) now. The largest and most liquid gold ETF in India is Goldman Sachs’ gold ETF, GoldBeES. It trades at about ₹2,428.

Gold ETF units were trading at a considerable premium to their NAV (net asset value) till recently due to supply disruptions following Government restrictions on gold imports. However, they are now available in the market at close to NAV price.

Prices have bottomed

There are many factors that can help prevent a decline in gold prices from current levels.

One, prices have already fallen close to the cost of production. The global average cost of mining an ounce of gold (including royalties, administration, mine development and other related costs) is $1,100-1,300.

This is almost 25 per cent lower than in the previous year, thanks to cost-cutting initiatives. With not much leeway for further reduction in costs, any fall in gold price from the current $1,230 levels may see miners stop exploration.

Already, many junior miners in Australia have closed operations as it has turned un-economical for them. Supply is further restricted by the fact that gold reserves globally are limited and new deposit discoveries are becoming rarer.

Two, there is no let up in the demand for gold. Even as supply has been growing at less than 2 per cent in the last decade, gold demand, especially for bars and coins, has grown at about 17 per cent on a compounded average basis.

In 2013, 1,654 tonnes of gold was consumed as bars and coins (1,289 tonnes in 2012). Investment demand slackened between January and June 2014. But there are indications that demand has picked up in the September quarter. Gold coin sales by the US Mint rose to 58,000 ounces in September from 25,000 ounces in August.

Strong demand

Investors apart, central banks are also buying gold. Data from Thomson Reuters GFMS show that central banks were net buyers of gold for the fourteenth consecutive quarter in June 2014. Between January and June, central banks bought 242 tonnes of gold.

With the middle-class population in Asia increasing, demand for gold from consumers will also go up in the long run. In 2013, gold jewellery demand hit an all-time high of 2,209 tonnes due to purchases in China and India.

By investing in gold now you can also make some currency-related gains if the rupee weakens. Gold can be a good diversifier as it has a negative correlation with most other asset classes.

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