Gold: Volatile in the Short Term, Good for the Long Term

Posted On Friday, Sep 25, 2020


We are currently witnessing a correction in asset prices driven by global risk aversion and a strengthening US dollar. Unrelenting pandemic and geo-political tensions are casting a shadow on global economic recovery. Investors are getting nervous and we are seeing a sell-off in assets across the board, including gold. This seems to be similar to what happened in March when gold surprised market participants by temporarily moving in tandem with equities, as investors scrambled to sell what is liquid and profitable.

Yes, gold's popularity might have waned a bit as of now. Analysts and money managers may be proclaiming an end to the bull market. But gold investors with long-term horizons have more than enough reason to remain calm and confident. That's because the macroeconomic tailwinds that instigated the bull market in gold in the first place, are very much intact, and are expected to stay that way for the next few years, so that gold plays a risk-reducing, return-enhancing role for their portfolio.

We are talking about the ultra-low interest rate environment, soaring deficits & unsustainable debts, rising inflation and debasement of currencies.

The coronavirus pandemic is expected to impact economic activity for years to come, with the economic outlook looking grim. This tells us that monetary and fiscal policies around the world will continue to be accommodative to boost GDP growth.

Massive and unserviceable mountains of government debt are piling up throughout the developed world as governments roll out stimulus measures in a bid to boost pandemic-hit economies. This combined with sluggish economic growth is making central banks around the world print unprecedented amounts of dollars and other currency in order to fund the government’s bills and try and stimulate the economy. This monetary inflation and the resulting price inflation will result in debasement of the dollar and other currencies, weakening their purchasing power. Gold, a stable form of money with potential to store value over long time periods, will become a preferred choice for investors and savers seeking wealth preservation. Gold can act as a counterweight to paper money which is fast diminishing its credibility as a store of value.

In addition, such unprecedented expansion of balance sheets could potentially lead to defaults and debt crises in the long run, especially in the weaker economies. In this case too, gold would be a big beneficiary. As of now, record high debt levels by the United States government which are set to reach 120% of GDP by the end of 2020 are becoming a cause for concern and threatening the dollar’s reign as a reserve currency. Gold, which is priced in dollars, is set to benefit from this sliding confidence in the dollar.

As part of the accommodative policy to boost economic growth, bond yields and interest rates are bound to stay low in nominal terms and negative in real terms for the foreseeable future - the Federal Reserve has committed to keeping rates near zero till 2023. Such low yields will limit bond markets’ ability to act as a hedge against equity price volatility and at the same time minimize the opportunity cost of holding zero-yielding gold. This trend will be bullish for the yellow metal as it becomes a preferred asset for portfolio diversification.

In essence, we do not believe that there has been any material change in fundamentals that have led to the Bull Run in gold. The decline in gold prices seems to be a temporary corrective, consolidative phase and we aren't surprised. The Bull Run in gold from 2000 to 2012 had 7 reasonable sized corrections and so could this Bull Run.

Cut to now. As tremendous uncertainty persists in the global markets, gold’s near-term movement, like other asset classes, won't be linear in direction. But it is important to view this volatility as an opportunity, not as a risk.

This investor understands equities are higher risk instruments compared to fixed income instruments like Bonds, but both carry risks. Since mutual funds are vehicles with these underlying assets, they too carry that risk.

With the recent fall in prices, gold's risk-reward proposition now looks even more alluring. It is indeed a good time to actually be buying the metal, not avoiding it.

We suggest that investors should invest during the dips and build their allocation to the metal. Gold has given 26% returns as on September 24th, in this calendar year to those who have has invested in it. Because the lingering macroeconomic uncertainties and systemic vulnerabilities as laid out above are going to ensure that gold will remain a preferred strategic asset for years to come, powering its price to new highs.

Editor's note: To further add on to your Gold investments write to us at [email protected] Or give us a missed call at +91-22-68293807 and we will call you back.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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