While gold unarguably retains its status of ?the asset of last resort? from the long-term perspective, its short-term fundamentals have changed. Investor sentiments have been hit hard in the past few years and the continuing global economic concerns have had a bearing on investment actions. Investments are now more tuned towards the short term and uncertainty in the global markets has made it difficult to predict a trend from more than two-to-three months? perspective.
With the macroeconomic scenario being a major driver of commodity prices, the inherent fundamentals of many commodities have lower importance in deriving the near-term trend. Gold is no exception and this is clearly visible by the way the yellow metal is following risky assets. In the past, movement in gold was divergent to that of equities, but, in the current context, both move together, citing a shift in investor beliefs.
Someone who opted for gold as a continuous form of investment either by way of jewellery or gold coins/bars earlier, would have now become wary as the movement in gold has been unpredictable. Testing of all-time highs above the $19,00/oz mark, followed by a sharp sell-off has triggered concern. Hence, an investor who is bullish for prospects of gold has now moved from only staying put in the physical gold market to entering the ETF space. But those people whose investment portfolios feel empty without gold are also opting for other investment avenues within gold.
But barring the current context, one must keep in mind that the existing economic concerns could only widen as not only Europe, but also the emerging and developing economies face economic woes. With slow progress in the US economy, further quantitative easing cannot be ruled out and other economies in Europe as well could opt for policies like lower interest rates, which could again trigger a fresh rally in gold. Taking history into account, the introduction of quantitative easing in the US in 2008 supported a gold price rally and there was no looking back till the recent new all-time high of $1920/oz. Between early 90s till almost the early 2008, movement in Spot Gold and Dow Jones was divergent but after the implementation of quantitative easing, gold prices rallied along with the rally in equities as sentiments got a boost that the economic scenario would improve on account of these measures.
Fundamentally, a poor global economy and periods of high inflation lead to a sharp rally in gold prices. In 2009, when GDP of the global economy slipped in the negative territory, gold witnessed a sharp upside.
The changing face of gold?s demand drivers is apparent and gold is moving in tandem with risk sentiments in global equities. On a year-to-date basis, gold has risen around 6% against an average gain of more than 11% in case of global equities.
Gains in equities indicate that investors feel more settled regardless of economic hurdles. Prolonged presence of a gloomy global economy and the extensive support to global majors in the form of quantitative easing is supporting sentiments in global equities.
The yellow metal has clearly shown a distinctive move, but yet again with a new tone. For a long-term investor, the current divergent trends should not be a deterrent for future investments, as any form of easing by the Federal Reserve, along with loose monetary policies in many economies, will boost commodity prices. Any downtrend in gold is a good opportunity for investors to enter the commodity with a long-term horizon. Our conviction for gold?s long-term bullish trend is strong, as it is not only the retail investors who are invested in gold but also global central bankers who believe that the long-term value of the US Dollar Index is expected to deteriorate; thus supporting prices of gold.
Also, as the dollar is expected to weaken in the long-term, the next safe-haven asset class is gold. Hence, from having a holistic portfolio, which not only fulfills short-term needs but also long-term goals ? gold remains the best bet.
The writer is associate director, Commodities and Currencies, Angel Broking