Buy gold: Any correction is a good entry point

By: |
Published: April 10, 2020 1:40:10 AM

The macroeconomic backdrop has become favourable for gold; aim for 10-15% of portfolio alloc-ation to the yellow metal

Despite the volatility, gold prices ended the month flattish with a minor loss of -0.1% against other risk assets that saw significant losses, reiterating its diversification role in times of turmoil.Despite the volatility, gold prices ended the month flattish with a minor loss of -0.1% against other risk assets that saw significant losses, reiterating its diversification role in times of turmoil.

March 2020 turned out to be a roller-coaster of a month which saw the coronavirus pandemic rapidly intensifying. It saw unprecedented policy actions like synchronised national lockdowns to counter the spread of the virus to monetary policies to cushion the economic disruption. Despite the volatility, gold prices ended the month flattish with a minor loss of -0.1% against other risk assets that saw significant losses, reiterating its diversification role in times of turmoil.

Gold surprised market participants in March by moving in tandem with equities, when it was expected to do the opposite. Now, when there is a sharp fall in asset markets, you can only sell what is liquid, profitable and has low impact cost, and thus gold saw temporary sell-off on account of a need to raise cash for margin calls to cover losses elsewhere.

Downside corrections in 2008
Gold experienced some downside corrections at the start of the global financial crisis too, weighed down by a world seeking safety of dollars, requiring forced sales of liquid assets. But by the end of 2008, riding on the back of newly announced quantitative easing measures, gold was one of the few assets to post positive returns. We are beginning to see a similar pattern emerge as gold prices stabilised over the last week and rallied from below $1,500 levels to above $1,600 as the Federal Reserve announced its intention of unlimited bond buying.

We are thus of the view that a healthy gold rally will now resume in spite of turbulent markets and losses in risk assets as there is ample newly injected liquidity in the system, eliminating the need to liquidate positions in gold. The Fed through its various programs is virtually ready to provide liquidity even for troubled assets. It is reasonable to say that a good part of the easy money will now find its way to “store of value” assets like gold till the risk aversion persists, pushing up prices further.

Good time to buy gold?
The macroeconomic backdrop has become increasingly favourable for gold. The world is staring at virus induced economic deceleration which is expected to encourage a rotation of money from risk assets like stocks and bonds to defensive assets like gold. There is heightened risk and uncertainty as magnitude of the epidemic and duration of containment measures are big unknowns. The opportunity costs of holding gold are going down as central bankers aggressively cut rates bringing real rates into negative territory and implement liquidity injections leading to currency debasement. Lastly, though the economic slowdown may soften consumer demand for gold, investment flows into the metal are expected to increase as investors flee risk assets. Thus, as of now most factors suggest a bullish trend for gold prices.

Potential rupee depreciation on account of foreign institutional investors pulling out money from Indian markets will add to gold’s returns when measured in rupee terms.

Any correction can be a good entry point for investors to accumulate long-term positions. All those who don’t have 10-15% allocation to gold in their portfolio, should consider it, given the fast unfolding macro-economic scenario where economies dive into recession, the cost of economic damage remains a big unknown and central banks remain committed to support economies at all costs; indeed constructive for gold.

The writer is senior fund manager, Alternative Investments, Quantum AMC

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Venturing out in Lockdown? You may face difficulty in motor insurance claim
2Buying health insurance plans: How existing and new policyholders are impacted in times of COVID-19
3Commercial real estate to move northwards in Tier 2 markets post Covid-19