Gold rush continues to dent realty growth

Indians are always susceptible to investing in gold and real estate, irrespective of the market condition.  However, when there is a slump in any of the two mentioned basic investment options, people’s first choice would be to park their money in yellow metal, as unlike real estate, gold possesses better liquidity and provides long-time investment option too.

So, when the gold prices slumped in the international markets to August 2011 level, the bullion value in domestic markets too reached its nadir, though analysts say, it would be difficult to predict the lowest point of the current slump pattern.  

This means, if one buys ornamental gold today at Rs 2711 per gram, he would be buying it at the rate existing two years ago. No wonder, we are witnessing a heavy rush in all leading jewellary shops across the state. However, the slump has affected small time jewelers, who have to sit on the gold purchased at higher rate and have no option but to offload it at much lower rate.

So, it is natural that people in India, who are known for their affinity towards buying gold, are now shopping for the yellow metal. Some are even pledging old ornaments or taking loan to buy new gold thinking that the slump is temporary and gold prices will shoot again in future.

As investment in gold and real estate is inter-related, the slum in gold has come as God sent for people who wanted invest in real estate but were reluctant to put their money in the highly volatile and unpredictable real estate in India.

As there are low or negative returns on real estate, the demand for gold and other commodities typically is expected to increase, and that is what happening now, according to a few real estate consultants in Chennai.

According to Anuj Puri, Country Head Chairman, JonesLang LaSalle India, ”Indian real estate is definitely not the best route for short-term investors. When it comes to opportunistic trading, gold is doubtlessly a far more suitable asset class – not least of all because one can purchase it in small or large amounts and liquefy it quickly. Turning a profit with gold is really only a matter of timing the market.

Even retail investors are drifting away from the equity market investments to safer asset classes such as gold, according to industry sources.

However, the recent fall in gold price has raised questions whether the returns given by these relatively safer investments are likely to sustain. While the gold price has fallen 20% from the peak, are the real estate prices also likely to correct is the question asked by the most.

However, an analysis done by Karvy's research team on 20 years data of the Hong Kong real estate index and gold price showed that the prices of both have 81% correlation.

So, a fall in gold prices could prompt more money for precious metal and less for real estate, Karvy Stock Broking pointed out. This means when investors eye gold to make money, real estate will take the back seat of investment option, which in turn will make homes affordable for prospective buyers.

Experts also view that the correction between real estate and gold will make people sell their real estate investments and invest in the yellow metal. Will there be a large scale correction in realty prices if the prices of yellow metal further go down? Only time will tell.