Why It Makes Sense to Add Gold to Your Investment Portfolio Now? Monday, Jun 01, 2020
Gold, the precious yellow metal, commands a store of value, i.e. it is looked up to a lender of last resort during economic uncertainties. Over the years it has continued to display its sheen and still remains the most lucrative precious metal to invest in.
Particularly now that the world is battling with Coronavirus or COVID-19 and there is no evident containment from its spread yet, the spotlights will continue to remain on gold.
Gold is an essential asset that is treated differently because...
✓ The ability to act as an effective tool
✓ An effective portfolio diversifier
✓ Potential to generate good risk-adjusted returns over the long-term
✓ Can counter inflation over the long run
✓ Highly liquid
✓ And can help deal with systemic risk, during stressful, uncertain times
Gold as an asset generally shares negative correlation with other assets (such as equity, debt, real estate etc.), and tends to perform better during risk-off periods.
The current times of Coronavirus global pandemic, where many countries (India included) have ordered lockdowns, it is bound to hit the economies real hard. For this very reason, global growth has been reduced sharply by the International Monetary Fund (IMF), the World Bank, and several rating agencies.
The World Gold Council (WGC) expects the market risk and economic growth interaction to impact gold prices this year. Mainly, the following factors will keep the focus on gold as per the WGC:
✓ Financial uncertainty and lower interest rates
✓ Weakening in global economic growth
✓ Gold price volatility
The WGC has also stated that the uncertainty brought about by the novel Coronavirus and its potential impact on public safety and economic growth could be added to the list.
The COVID-19 lockdown has, of course, clogged the activity in gold markets including India’s. In Indian rupee terms price per 10 gram of gold corrected by -3.2% in March 2020, nonetheless remained over Rs 40,000/10 gram. During the January to March 2020 quarter, gold gained nearly +5.0%.
The Association of Mutual Funds in India (AMFI) recent data sheds light on the precious yellow metal being favoured for investment through the rise in the number of folios and the increase in Average Asset under Management (AAUM) of the Gold ETFs (see Graph 2).
In many parts of the world as well, gold ETFs have witnessed positive participation as central banks continued to lower interest rates and adopt an accommodative monetary policy stance to support growth. Global gold-backed ETFs (gold ETFs) and similar products added 298 tonnes(t), or net inflows of US $23bn, across all regions in the first quarter of 2020 – the highest quarterly amount ever in absolute US dollar terms and the largest tonnage additions since 2016, as per the WGC.
This shows that investors are rightly buying gold, recognising it to be a store of value during uncertainty. While demand for jewellery and physical gold has taken a hit, the focus currently is on the investment forms of gold.
Even with the central banks of the world recognising the risk involved are adding to their gold reserves (see Graph 3). Gold, as you may know, plays an important role in central bank’s reserve management.
Currently, the following factors would prove supportive for gold...
• The outbreak of COVID-19 with no evident containment yet
• Economic uncertainty and fears of a virus-led global recession
• Global GDP growth revised downwards and for across regions
• A record-high global debt-to-GDP of nearly US$ 255 trillion (over 322% of global GDP) - 40 percentage points higher than at the onset of 2008 global financial crisis according to the Institute of International Finance (IIF), as the world is fighting the COVID-19 pandemic
• The easy monetary policy action and accommodative stance followed by central banks of the world and stimulus packages to boost growth.
• Depreciation of the Indian rupee against the dollar
• The crash in oil market prices
• Trade war tensions due to protectionist policies followed
• Geopolitical tensions
• The US Presidential elections later this year, in November 2020
• Potential risk to the inflation trajectory
• And the Increased stock market volatility
Given the on-going extreme turbulence in the equities, gold holds the potential to provide risk- adjusted returns. Last year, i.e. in 2019, the precious yellow metal posted an absolute return of nearly +25% when other asset classes witnessed high volatility and posted not so good returns.
The road ahead for Gold...
Until the COVID-19 pandemic is contained and economic uncertainty prevails, the spotlights will continue to remain on gold.
It makes good sense to invest in gold strategically.. The long-term secular uptrend exhibited by gold is something that invites attention and highlights the importance of owning gold in the portfolio with a longer investment horizon.
Plus, if the southwest monsoon indeed turns out to be normal as expected by the Indian Meteorological Department (IMD), demand for gold may rise and it will shine further.
In the current situation, consider allocating some portion of the investment portfolio to gold. Allocate around 10-15% of the entire investment portfolio to gold and hold it with a long-term investment horizon. Invest in gold the smart way through gold Exchange Traded Funds (ETFs) or gold savings funds.
Gold will continue to play its role as an effective portfolio diversifier and a store of value during economic uncertainty.
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