Is Gold set to loose its shine?

Indians love gold, they cover their brides and shower their temples with the precious metal, traditionally used as a sparkling insurance policy and inflation hedge to be cashed in when needed.

While the South Asian nation is the world’s second largest consumer of gold after China, it seems to be losing some of its appetite for the precious metal as an investment.

Demand for gold in India fell 39% from a year earlier in the quarter ended June to 204.1 tons, the World Gold Council said last week. Investment demand — buying of gold in the form of coins or bars rather than jewelry — plummeted even further, losing 67%.

For the few that could afford it, stocking away piles of gold bars and coins in home safes and safety deposit boxes at banks had become a popular investment vehicle over the last three years. Indians bought over 2.5 times more gold bars and coins in 2013 than they did in 2009.

This year, however, demand has been slammed by bad returns, government restrictions and better investment options.

“It’s not lucrative to invest in gold anymore,” said Aurobinda Prasad, Chief Research Analyst at Hyderabad-based commodity broker Karvy Comtrade Ltd.

With optimism about the economy growing — in part due to hopes the Bharatiya Janata Party will be able to use the rare majority in the lower house of Parliament it won in May to implement policies to boost the economy — stocks and real estate offer better returns than gold recently, analysts said.

Meanwhile the rural investors, who are more likely than big city consumers to store their wealth in gold, are having a bad year due to below-average rain.

A weak monsoon and higher inflation have cut down the purchasing power of rural consumers, said P.R. Somasundaram, India’s Managing Director of the World Gold Council.

Mr. Somasundaram expects India’s total gold demand in 2014 to slide to as low as 850 tons, down from 975 tons last year. The decline in the amount of gold bought for investment should be even more steep, analysts said.

“Gold is not an attractive asset when the economy is doing better,” said Kishore Narne at Indian broker Motilal Oswal.

In the western state of Gujarat and India’s southern states, which typically invest in gold, investors are switching to property, said Mr. Prasad at Karvy.

Government restrictions have also taken the shine off of gold as an investment.

New Delhi slapped higher taxes and trading restrictions on gold last year, hoping to rein in the country’s chronic current account deficit. Even though smugglers and gold couriers have been bringing in a huge amount of gold to meet demand, supply has dwindled. The artificial restrictions on the market mean gold prices in India is more expensive than it should be.

With the government restrictions unlikely to be lifted any time soon and better investment options in the stock and real estate markets, analysts said gold will remain out of favor as an investment.

Real Estate far outperforms Gold in all of the following metrics: Cash flow, leverage, equity buildup, tax benefits, stability and control.

Although Gold is more stable than stocks, it is still more volatile than Real Estate. Over the past 40 years, gold experienced a decline in value in 15 of the past 40 years. Those declines ranged from a low of -0.05% to a high of 25.2% in one year. During several years, gold declined more than 10% in value. Real Estate, on the other hand, experienced declines in value in only 5 of the last 40 years. Those declines ranged from a low of 1.74% to a high of 7.42%. Real Estate is unquestionably less volatile than gold.

                                                                                                                      

                                                                                                                          

                                                                                                                                 Source: Indiarealtime