Gold the ‘currency of last resort’: Right time to hike gold allocation; these factors may fuel prices

September 9, 2020 2:43 PM

Investors can choose from a variety of gold investment products including physical gold, digital gold, Gold ETFs, Gold funds and SGBs.

gold, gold price, gold etfGold serves multiple purposes: an investment, a reserve asset, an adornment and at times, even a technology component

By Rajesh Cheruvu

Crisis periods drive investor sentiments to an extreme risk-off bringing safe-haven assets into focus. Gold is one of the premium stores of value, even at times, better than the reserve currency USD. CY19 saw gold rallying as the US-China trade war led to a weak global economy. This forced central banks to open the liquidity tap which acted as a big booster to gold prices. As India too witnessed an economic slowdown, gold outperformed the risk asset class of Equity in CY19. CY20 started off on a much weaker footing as Covid-19 pandemic disruption has led to recession risks on par or even, greater than the Great Depression Era. This has further enhanced the appeal of gold as many investors now consider it the “currency of last resort”.

Gold serves multiple purposes: an investment, a reserve asset, an adornment and at times, even a technology component. Gold is fairly liquid, no one’s liability, carries no credit risk, and being scarce, historically preserves its value over time. Perceptions for gold as an asset class for investment have changed substantially over the past two decades as the macro super-cycle of a commodity like gold can be fairly elongated. These unique characteristics make it a genuine candidate for increasing diversification over the long term in a portfolio.

The infinite QE promise from the US Fed and other global central banks will ensure the gush of easy liquidity will continue till the economy gets back on its firm feet. The falling dollar index and the ultra-low interest rates make Gold even more attractive as an opportunity cost to holding is negligible.

There has been massive fiscal stimulus from the governments during the crisis and this may lead to inflation with economic recovery looking a good year or two away. Gold is the best inflation hedge there is, and the demand for Gold may continue for that long. This was observed during the 2009 Global Financial Crisis when Gold was in demand and prices were rising till 2013-14. Prices of crude oil and gold usually tend to move in tandem. But even as the crude prices fell recently due to the price war and the pandemic, gold prices have made new highs and there has been some disconnect between the prices of yellow and black gold mainly due to the rising demand for yellow gold.

However, gold did stumble a little from its peak recently, due to tapering of risk aversion but the flexible central bank policies and the demand for a hedge against volatility and inflation arising from a possible second wave of Covid-19, risk of US elections, Indo-China and other geopolitical turmoil are expected to keep it glittering for long. These factors make this a good time to tactically increase allocation towards gold in a staggered manner and on dips.

Investors can choose from a variety of gold investment products including physical gold, digital gold, Gold ETFs, Gold funds and SGBs. Gold ETFs are the most optimal investment vehicle driven by high liquidity. They are easily available (only a DEMAT account is required), tradeable via the exchange and have no exit loads (unlike certain Gold Funds). Being publicly traded on exchanges, they are completely transparent in their holdings and combine the flexibility of stock investments and simplicity of gold investments into a single product. The risk of theft is curbed as there is no actual storage of physical gold. Due to their unique structure and creation mechanism, the ETFs have a much lower expense (0.5-1% p.a. management charges with minor brokerage) as compared to physical gold investments due to lack of making, wastage, logistics/storage charges.

(The author is Chief Investment Officer (CIO) at Validus Wealth. Views are the author’s own.)

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