Posted On Saturday, Oct 10, 2020
With Gold prices moving south, investors are now wondering if they could look at the yellow metal when it comes to further diversifying their portfolio. In this exclusive Q &A Chirag explains how this is just a temporary correction in Gold prices and what should ideally be their next move.
1) Gold is down from all-time highs, has the gold rally run its course?
With gold prices down 8% from August highs, everyone seems to be asking this question. We believe the recent decline in gold prices is temporary in nature. Like what we witness in every bull market, it's more likely a corrective, consolidative phase. That's because the macroeconomic tailwinds of ultra-low interest rates, soaring deficits & unsustainable debts, rising inflation and debasement of dollar and other currencies that instigated the bull market in gold, are very much intact. In fact, they are expected to stay that way for the next few years as the world deals with the long-term economic consequences of Covid-19.
Gold, because of its characteristic of being a stable form of money with potential to store value over long time periods and its tendency to appreciate in times of negative interest rates or when there is a loss of confidence in the economy and monetary system, will thus continue to be a preferred portfolio asset.
2) Why has gold been so volatile off late?
We are currently witnessing volatility in asset prices driven by global risk aversion and a strengthening US dollar. An unrelenting pandemic and geo-political tensions are casting a shadow on global economic recovery. Hopes of another round of stimulus by the US government, seen as vital to support the pandemic-stricken economy, are fading now as attention seems to have moved to the elections and away from the economy. Markets are also bracing for turmoil on the US election front.
This cocktail of influences is making investors 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.
3) Is it advisable to invest in gold at current levels? How much Gold should one own?
With the recent fall in prices, gold's risk-reward proposition now looks even more alluring.
With an unswerving pandemic, sluggish economic recovery, and political worries, it is indeed a smart time to be buying the metal, not avoiding it. We suggest that investors use this correction to build their allocation to this monetary asset, especially those who have not invested yet consider a near 25% returns that the asset class has given its holders this calendar year. Because the macroeconomic realities facing the world today are going to ensure that gold will remain a preferred strategic asset now and for years to come, powering its price to new highs.
We suggest a 10-15% portfolio allocation to gold to capitalize on its risk-reducing, return-enhancing characteristics in these times of crisis and financial repression.
4) What would be the impact of a Covid-19 vaccine on gold prices?
Governments around the world are expediting the usual approval processes in order to deliver a vaccine quickly, raising skepticism about safety and efficacy. Even if one was to ignore that, most vaccines, in the final stages of clinical trials, are expected to be publicly available only by mid-2021.
There is no doubt that a successful vaccine's impact on the health effects of the pandemic will be positive. But it can't undo the extraordinary economic damage caused over the last few months overnight. Thus, even though the announcement of a vaccine may lead to a temporary correction in gold prices, and drive up risk sentiment, ground economic realities will take time to fix.
And thus, the major driver of the current gold rally - accommodative central bank policies will continue to operate for the foreseeable future, supporting economic growth as well as gold prices over the medium to long term.
5) Given the low interest rates, is gold now a better portfolio diversifier than bonds?
Central banks continued to remain accommodative for six years following the Global financial crisis of 2008 and this is many times more severe than that. This tells us policies around the world will continue to be accommodative to boost GDP growth for the next few years.
Already, as per the IMF, global public debt is expected to exceed 100% of GDP in 2020-21, up from 80% last year. And the average fiscal deficit is expected to touch 14% of GDP in 2020, up from 4% last year. This is an unprecedented rise. Low debt servicing costs are the only way to manage these debt levels.
Thus, bond yields and short-term interest rates are bound to stay low for the foreseeable future. In addition, the potential for bond price appreciation isn't much considering that rates are at all-time lows already. Both these things are expected to reduce bond returns and increase gold's portfolio utility as a diversifier.
It's time to Invest in Gold
Investing in physical gold comes at a premium of 5-15% above gold prices on account of wholesale and retail markups, making charges, GST etc. Plus there is always a risk. Risk of purity and theft. On the other hand if you invest in Gold mutual funds you don’t have to worry about purity, storage, making charges/premium and insurance of gold. Each unit of a Gold ETF represents ½ gram of 24 carat physical gold. To further make investing in Gold more efficient investors can also opt for an SIP by investing in Gold Savings Fund.
Editor's note: To know more about investing in Gold funds (adding 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. We will be happy to assist you.
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