Your Money: Bet on risk-reducing, return-enhancing gold

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November 6, 2020 12:30 AM

Gold will continue to be a stable form of money in the midst of this global currency debasement and will appreciate in these times of low interest rates

Gold, which is priced in dollars tends to weaken when the currency strengthens and rising yields increase the opportunity cost of holding gold, thus hurting the metal.Gold, which is priced in dollars tends to weaken when the currency strengthens and rising yields increase the opportunity cost of holding gold, thus hurting the metal.

Gold moved back and forth around $1,900 levels for most of October before settling at around $1880/ounce, 1.4% lower for the month. It was mainly reacting to the fluctuations of the other safe havens, the US dollar and US Treasury yields, triggered by conflicting developments on the next round of fiscal stimulus in the United States and market anxiety leading up to the most consequential US presidential elections in recent history.

October was gloomy as far as Covid-19 developments are concerned. US coronavirus cases have hit a record daily high. Cases are resurging in Europe too, where the UK, Italy, France and Germany have imposed new restrictions, curfews and lockdowns. Most vaccines, in the final stages of clinical trials, are expected to be publicly available only by mid-2021.

Accommodative policy to continue
We are already aware of how dire the economic effects of such lockdowns will be, with the global economy having fallen into a deep recession due to the Great Lockdown of 2020. The IMF has now projected that the global economy will contract by 4.4% in 2020, but has warned that the climb will be long, uneven, uncertain and prone to setbacks. The second wave of the disease is expected to increase the financial fragility.

As such, sustained government relief measures and lower interest rates and quantitative easing by central banks are imperative to get the economy through this health cum economic crisis for as long as it takes. Gold will continue to be a stable form of money with potential to store value in the midst of this global currency debasement and will appreciate in these times of low interest rates. It will thus continue to be a preferred portfolio asset generating good risk adjusted returns for its holders for the foreseeable future.

Outlook for gold remains positive
Gold, which is priced in dollars tends to weaken when the currency strengthens and rising yields increase the opportunity cost of holding gold, thus hurting the metal. But there’s no question that more stimulus is in the pipeline for Americans irrespective of who wins the election. More stimulus and spending will translate into higher inflation, especially given that the Federal Reserve has said that it will allow inflation to run higher before tightening monetary policy, which will mean sustained negative real yields. Gold will be a direct beneficiary of both these trends. Also, if the uncertainty increases on further Covid-19 scare or from a contested election in the US, gold will soon start attracting bids despite any dollar strength.

If you haven’t already allocated 10% to 15% of your investment portfolio to gold yet, this Dhanteras could be a good time. Since purity is a concern when buying physical gold and since the purchase of gold bars and coins comes at a premium on account of markups and making charges, we suggest that investors choose the more price efficient and pure Gold ETF route for investing. If you have completed your allocation, just sit tight and watch gold play a risk-reducing, return-enhancing role for your portfolio.

The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund

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