Want to beat recession? Don’t forget to buy gold

Published: April 20, 2020 6:20:53 AM

Increase your allocation to gold via the gold fund route from the safety and comfort of your home.

Bad news is that a recession is here.

The last few weeks have turned out to be a roller-coaster ride as we saw the coronavirus pandemic rapidly intensifying as it moved on from China and engulfed most of the developed world, with cases and fatalities rising the world over. We saw unprecedented policy actions like synchronised national lockdowns to counter the spread of the virus, and “do whatever it takes” monetary policies to cushion the economic disruption that is expected to follow. We also witnessed global stock markets lose about a quarter of their value due to virus-driven panic selling. And unfortunately, we also saw a health crisis snowball into an economic one with the world quickly moving from “fears of a recession” to indeed a recession!

Yes, the bad news is that a recession is here. But the good news is that gold could help you get through it. We give you five reasons why.

#1: In times of recession, counterparty risks in paper assets like bonds tend to increase. Gold, on the other hand, cannot default, go bankrupt or fail to carry out its end of the deal. Its value is retained in spite of the recession as it is backed up not by paper promises but by inherent value.

#2: Unlike equities, gold does not require a business to keep it afloat. Gold’s value isn’t dependent on revenues and profits. This makes holding gold imperative during an economic downturn when stocks are hit by losses.

# 3: As central banks cut rates to facilitate flow of credit into the system and reignite economic activity, your fixed-income instruments will yield lower or re-price at a lower rate of interest. This reduces the opportunity cost of holding gold, further increasing its attractiveness as an asset class in a low-yielding recessionary environment.

# 4: Central banks are injecting liquidity with their bond-buying programmes to dodge a system-wide collapse and boost economic activity. With too much of this easy money floating around, there is a probability of higher inflation over the next few years, lowering the purchasing power of the currency you hold. In contrast, gold is a reliable store of value as it cannot be printed or created at the discretion of central banks.

#5: Gold benefits from economic distress and crisis as people shun risk assets and flee to gold’s safety. The asset class thus attracts more flows, and this momentum, in turn, ensures further gains.
Gold is thus an ideal asset class to help your portfolio get through a recession. Go ahead and stock up on the metal, if you haven’t already.

Given the nationwide lockdown, there are restrictions on the movement of people as well as non-essential goods. This could make it difficult for you to go about sourcing physical gold coins and bars for your investment needs. But you can always choose to increase your much-needed allocation to gold via the gold fund route. Rather, this is indeed an opportunity to shift towards an efficient way of buying gold through gold funds where units are backed by physical gold holdings of 24 karat. They are well regulated and continue to operate despite the lockdown, becoming a preferred way to invest in the precious metal as you can sit in the safety and comfort of your home and buy and sell it as and when you want.

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

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