Market experts believe that for Indians, there is no right or wrong time to purchase or invest in gold as the consumption of gold here is need-based rather than investment-based.
Gold prices have rallied ~45% on the domestic front over the last couple of years and the major question hovering in the mind of investors, therefore, is: Have gold prices peaked or is there some steam still left?
Market experts say a large move is still about to happen. “In fact, there are many supportive factors for the current bull run and what could continue to drive the metal for the medium term,” says Navneet Damani, VP – Commodities Research, Motilal Oswal Financial Services.
Some of these factors are:
# Major central banks across the world have reduced their interest rate to almost 0%, with a possibility of going in the negative territory too. Apart from rate cuts, central banks have taken aggressive stance providing liquidity in the market. “All the actions taken will have a spillover effect on the economy, hence supporting the precious metal prices. Enormous liquidity push by central banks across the world is going to be underpinning fundamental support for continuation of gold strength,” says Damani.
# Investment demand has seen a drastic increase since the start of 2019. SPDR holdings, world’s largest ETF Fund, in the Q1’2020 stand at ~1180 tonnes, while the number in the same period in 2019 stood at ~794 tonnes.
# There is always a threat of inflation super spike somewhere down the lane, within 24-36 months due to such a high liquidity in the system. Dearth of returns in many other asset classes will drive money towards gold. Though currencies may be stable against each other, but they will lose their value against gold.
# Finite supply of gold around $21B worth of new supply every year.
# Prolonged slowdown or quick recovery both shall have similar impact on gold. A Faster ‘V’ shaped recovery would lead to a sell-off in dollar as investors dump safe-heaven, and gold would rise.
# For calendar year 2020, the price is likely to hold support at $1610-1580 zone and the current rally could extend higher towards its all-time high level of $1920, thus yielding about 27%.
# Going into 2021, the price is expected to extend its bullishness by another 30% to test a fresh all-time high level of $2500.
# Domestic gold prices are likely to touch an all-time high of Rs 53,000 in the calendar year 2020. “The same trend is likely to persist in 2021, extending gains by a further 30% and test Rs 68,000 towards the end of 2021,” informs Damani.
Should you invest in gold?
Market experts believe that for Indians, there is no right or wrong time to purchase or invest in gold. The consumption of gold in India is need-based (marriage, religious functions, and the matter of pride) rather than investment-based. Hence, the rationale of right time or right price does not fall well in place for gold consumers in India.
Moreover, “gold has already given double digit returns in the first half of 2020 and with so much global uncertainty, gold should be a part of an investor’s portfolio, whether it be retail or funds participation,” says Prathamesh Mallya, AVP – Research Non-Agri Commodities and Currencies, Angel Broking Ltd.
As a matter of fact, if gold has to be purchased for investment, it is rightfully the correct time to enter this asset class as the global world has come to a standstill on account of the Coronavirus pandemic.
The pandemic has caused deeper damage to the world economy than first thought as IMF has said in its recent update (on 24th June 2020) that the 2020 global output will shrink by 4.9%, compared with a 3.0% contraction predicted in April, when it used data available as widespread business lockdowns were just getting into full swing.
“With the global output to contract and the economies in a deeper recession than most anticipate, gold as an asset class is a safe bet for investors across the globe. Although, the physical demand has declined drastically due to the restrictions and lockdowns, the activity of global central banks and their net purchases of gold signal that uncertainty will continue for most of 2020,” says Mallya.
The investment demand as seen in the net additions of ETF holdings also signals that gold will shine for a much longer time even if the pandemic is under control.
“We see gold prices in the international markets to move higher towards $1850 in a two-month time-frame, while MCX gold prices might move higher towards the Rs 50000/10 gms mark,” Mallya says, adding, till then one may keep buying gold, if not in physical form, then in various other forms.
Factors to keep in mind while buying gold
Motilal Oswal Financial Services has done a SWOT analysis on gold and its future prospects which, it claims, may give one a clear understanding about the drivers, opportunities, and inherent threats of investing in precious metals in the medium to long term.