Why smart investors are buying gold in midst of Covid

Updated: May 28, 2020 11:58 AM

Gold as an asset usually shares negative correlation with other assets (such as equity, debt and real estate), and tends to perform better during risk-off periods. It protects the investors’ capital against tail risks and other events that have an adverse impact on capital or wealth.

Gold commands a store of value, i.e., it is seen as a lender of last resort during economic uncertainties.

By Jimmy Patel

Gold commands a store of value, i.e., it is seen as a lender of last resort during economic uncertainties. Over the years it has continued to display its sheen and still remains the most lucrative asset to invest in.

Particularly now when there is no imminent end to the Covid-19 pandemic, the spotlight will continue to remain on the precious metal. Gold as an asset usually shares negative correlation with other assets (such as equity, debt and real estate), and tends to perform better during risk-off periods. It protects the investors’ capital against tail risks and other events that have an adverse impact on capital or wealth.

Weakening global growth
The World Gold Council (WGC) expects that financial uncertainty, lower interest rates and weakening in global economic growth will impact gold prices this year. The WGC has also stated that the uncertainty brought about by coronavirus and its potential impact on public safety and economic growth could be added to the list.

The Covid-19 lockdown has, of course, clogged the activity in gold markets including India. In rupee terms, price per 10 gram of gold corrected by 3.2% in March, Nonetheless it remained over Rs 40,000 per 10 gram. During the January to March 2020 quarter, gold gained nearly 5%.

But going by the gold futures data—specifically the MCX Gold June Futures—reveals that gold is gaining some lost ground: price per 10 gram of gold is over Rs 46,000. So, this shows that investors are rightly approaching gold as a safe haven.

In many parts of the world, gold ETFs have witnessed positive participation as central banks continued to lower interest rates and adopt an accommodative monetary policy stance to support growth. Global gold-backed ETFs and similar products added 298 tonnes, or net inflows of $23 billion, across all regions in the first quarter of 2020—the highest quarterly amount ever in absolute US dollar terms and the largest tonnage additions since 2016, as per the WGC.

Smart investors are buying gold
Smart investors are rightly buying gold, recognising it to be a hedge and/or a store of value during uncertainty. While demand for jewellery and physical gold has taken a hit, the focus is on the investment forms of gold. Even the central banks of the world, recognising the risk involved, are adding to their gold reserves. Gold, as you may know, plays an important role in central banks’ reserve management.

Given the on-going extreme turbulence in the equities, gold holds the potential to provide respectable returns. Last year, i.e., in 2019, the precious yellow metal posted returns of 25% when other asset classes witnessed high volatility and posted not so luring returns.

The road ahead for gold
Until the Covid-19 pandemic is contained and economic uncertainty prevails, the spotlight will continue to remain on gold. It makes good sense to buy gold strategically. The long-term secular uptrend exhibited by gold highlights the importance of owning gold in the portfolio with a longer investment horizon.

In the current situation, consider allocating 10-15% of the entire investment portfolio to gold and hold it with a long-term investment horizon. Invest in gold the smart way through gold Exchange Traded Funds (ETFs) or gold savings funds. Gold will continue to play its role as an effective portfolio diversifier and a store of value during economic uncertainty.

The writer is MD & CEO, Quantum Mutual Fund

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