Global asset prices corrected in September driven by risk aversion and a strengthening US dollar. As the pandemic and geo-political tensions cast a shadow on global economic recovery, investors got nervous and we saw a sell-off in assets, including gold. Gold prices ended the month 4% lower at levels of $1,885/ounce. This seems to be similar to what happened in March.
Correction in gold prices
Gold is down 9% from its August highs. Skeptics may be talking about an end of the bull market. But we believe this is a temporary corrective phase. That’s because the factors of ultra-low interest rates, soaring deficits and debts, rising inflation and debasement of dollar that caused the bull market in gold, are very much intact. In fact, they are expected to stay that way for the next few years. Gold is a form of money with potential to store value over long time periods. It has a tendency to appreciate in times of negative interest rates or when there is a loss of confidence in the economy and monetary system. These traits will continue to make gold a preferred portfolio asset.
As such, gold investors with medium to long-term horizons can be ensured that gold will continue to play a risk-reducing, return-enhancing role for their portfolio. In the short term however, as uncertainty persists in the global markets, gold too could witness some volatility. But here’s why it is important to view this volatility as an opportunity, not as a risk.
Stock markets reflect reality
Investors may be glad to say goodbye to choppy September markets, but October may be no better. Optimism about a quick economic recovery and expectations of more fiscal stimulus, seem to have reduced. There is a good possibility that markets incorrectly interpreted a bounce from the bottom as a V-shaped recovery.
Hopes of another round of stimulus by the US government are fading now as attention moves to the elections. Without additional spending from the government, there are worries the economic recovery will slow down. Many of the stimulus programmes have expired, hurting consumer spending.
Financial markets are unlikely to stabilize until a vaccine is developed. Most vaccines, in the final stages of clinical trials, are expected to be publicly available only by mid-2021. With all the above forces influencing equities, gold will prove to be an attractive portfolio diversifier. Investors will continue to seek the stability of the asset in the uncertainty.
Recent dollar strength temporary
Till a few weeks ago, there wasn’t much talk about a dollar turnaround, given that the US central bank is expected to continue its accommodative policy for years to come. But the dollar tends to strengthen during periods of risk aversion and stock market volatility, like the one we are currently witnessing. The dollar has also been gaining as coronavirus cases begin to resurface in the Eurozone. This is raising concerns about what a second wave of infections might mean for the European economy and the Euro, sending investors into the dollar.
With the recent fall in prices, gold’s risk-reward offer now looks even better. It is indeed a smart time to actually be buying the metal, not avoiding it. We suggest that investors use this correction to build their allocation to this monetary asset that has given near 25% returns in 2020. Due to the the macroeconomic realities facing the world today, gold will remain a preferred strategic asset now and for years to come.
The writer is senior fund manager, Alternative Investments,
Quantum Mutual Fund