Gold as an investment during market uncertainties

December 8, 2020 1:47 PM

In India, gold prices were on an uptrend since last year as the economy showed multiple signs of slowing down and the Rupee depreciated against the Dollar, which added further to price appreciation as India imports much of its gold requirement.

gold, investments, savings, US Fed stimulus, equity, bond, FD returnsWith the global lockdown due to the COVID 19 pandemic, there was a flight to safety towards gold.

Since the start of the year 2020, gold has continued to shine and traded at multi-year highs, owing to the rampant spread of the pandemic across the globe, leading to economic uncertainties. As a means to address these uncertainties, top central banks globally unleashed various liquidity measures which were followed by government stimulus packages, all in a bid to contain the probable economic damage.

However, in India, gold prices were on an uptrend since last year as the economy showed multiple signs of slowing down and the Rupee depreciated against the Dollar, which added further to price appreciation as India imports much of its gold requirement.

In theory, gold prices and equities, in general, share an inverse relationship. When the equity markets are volatile and directionless on account of uncertainties, there is an increase in demand for gold due to investor’s flight to safety. Gold is considered one of the safest investment options and its prices may fluctuate but will never be zero.

Does this theory speak to reality? Yes, it does. Talk about the Dotcom bubble, WTC terror attack, or Global Financial Crisis, which began in 2007 and its aftereffects could be seen in the entire world till late 2011. During the same time, the gold prices shot up and continued their run till markets stabilized and uncertainties lessened. The recession in the early 2000s in the developed countries got the gold prices on the rise.

In the year 2001, the average gold price per gm was Rs 4,300. It touched Rs 5,700 in 2003 (15 per cent CAGR growth). During the 2008 recession, the gold prices shot up significantly. In fact, the S&P BSE Sensex had fallen over 50 per cent between January 2008 and February 2009, triggering a massive rise in gold prices, from Rs 10,800 to 14,500, almost a 30 per cent increase in a year. Sounds similar. Yes, the current crisis to has moved similar, with the stock market plunging by more than 40 per cent, and gold prices rising over 30 per cent.

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During 2007-2012, gold rose by 22 per cent CAGR, then for the next 5 years, the yellow metal lost much of its sheen and largely fell off the investor radar. Come 2020, globally, gold prices scaled $1,900 per ounce, a level which was last seen during 2011. On the domestic front, in the month of August, the yellow metal touched a peak of Rs 56,191/10 gram. Even though the prices have come off highs and gold is presently trading at sub Rs 50,000 levels, gold thus far has rallied over 30 percent this year, making it one of the best performing asset classes.

The Road Ahead

As long as the uncertainties relating to the pandemic persist, the yellow metal will continue to remain buoyant. However, it is impossible to predict if there is room for another runaway rally like the one seen during 2020. Since gold acts as a hedge against inflation and uncertainty and given its inverse correlation with interest rates, there is room for the prices to remain elevated in the times ahead. The assumption here is that the Fed along with other Central banks will continue to retain its current monetary policy stance and the government will keep up with relief packages as and when necessary.

Gold as a part of portfolio

From an investor’s perspective, gold should be looked at from an asset allocation point of view, as a hedge against financial assets in a portfolio. The general principle is that one can allocate ~10-15 per cent of a portfolio towards gold. The optimal allocation in one’s portfolio can be decided on consultation with a financial advisor.

Investment Options

It is a very well documented fact that investors in India are not averse to holding physical gold. But for portfolio purposes, the better option would be to consider one among the following gold investment vehicles – gold ETFs, gold fund/fund of a fund, or sovereign gold bonds. Of the three, gold ETFs offer the most flexibility.

When compared to physical gold, Gold ETFs offer some distinct advantages such as less worry about storage and theft as it is held in Demat form, lower cost of acquisition given the absence of making charges, and other related expenses. In case the investor is planning to meet any future requirement of gold, say a wedding, then such an investor can consider doing a SIP for as low as Rs 1,000 every month in Gold Fund of Funds. This will enable the investor to collect gold units over a period of time.

by Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC

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