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Sunday, 20 September 2020

Gold should be brought strategically

Gold has always been considered inversely proportional to other assets in its class- equity, debt, real estate etc. Amongst all these, gold has always given better returns during risk-off periods. The reason why gold enjoys a safe haven appeal is that it protects investors’ capital against tail risks and other events that have an adverse impact on capital or wealth.

During this pandemic too, gold has been seen performing significantly well across all asset classes. Precious metals prices continued their three-month long uptrend amid the COVID-19 pandemic. Demand for gold has been buoyed by safe-haven buying and global policy support in response to the pandemic. However, we saw gold fall sharply as the news of Russia discovering a vaccine came in.

The world is eagerly waiting for the discovery of a covid-19 vaccine in the hope that normalcy will return soon after. While experts say that it will definitely boost the economy, the impact may not be positive for all investment asset classes. For instance, gold, which has had a dream run this year, may correct, while equity might see a rally in the short term as it may have already factored in the vaccine discovery event. Experts believe that gold prices may correct post after a vaccine is approved.

Gold had a substantial run over the past one year and as no asset class can move in a straight line forever, gold prices are expected to correct as soon as an approved vaccine is discovered. However, the resurgence of patients in Europe is a brutal reminder that the pandemic is not over yet and that the second wave is only a couple of months away.

Prithviraj Kothari believes that such a second wave would be positive for gold prices. However, it should include the US as well, as the resurgence in cases limited to Europe could strengthen the greenback against the euro and gold, neutralizing the increased safe-haven demand for the yellow metal.

-If the second wave occurs, it should be bullish for gold not only because of the resulting economic slowdown and increased uncertainty but also because of the new stimulus programs that would probably be announced by both by the central banks and the governments.

And hence, sentiments for gold remain bullish. Following these sentiments, Smart investors are rightly buying gold, recognising it to be a hedge and/or a store of value during uncertainty. While demand for jewellery and physical gold has taken a hit, the focus is on the investment forms of gold. Even the central banks of the world, recognising the risk involved, are adding to their gold reserves. Gold, as you may know, plays an important role in central banks’ reserve management.

The top gold dealer in India opines given the on-going extreme turbulence in the equities, gold holds the potential to provide respectable returns.

Precious metals prices are expected to average 13% higher in 2020 relative to 2019 on expectations of strong demand due to heightened global uncertainty and ultra-low real interest rates. Upside risks to this outlook include a second COVID-19 wave causing a sharper-than-expected global slowdown. On the downside, a stronger U.S. dollar could push prices lower.

Particularly now when there is no imminent end to the Covid-19 pandemic, the spotlight will continue to remain on the precious metal.

Until the Covid-19 pandemic is contained and economic uncertainty prevails, the spotlight will continue to remain on gold. It makes good sense to buy gold strategically. The long-term secular uptrend exhibited by gold highlights the importance of owning gold in the portfolio with a longer investment horizon.

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