Since the start out of the year 2020, gold has continued to shine and traded at multi-year highs, owing to the rampant spread of the pandemic across the globe, major to financial uncertainties. As a implies to address these uncertainties, best central banks globally unleashed a variety of liquidity measures which have been followed by government stimulus packages, all in a bid to include the probable financial harm.
However, in India, gold rates have been on an uptrend due to the fact final year as the economy showed several indicators of slowing down and the Rupee depreciated against the Dollar, which added additional to value appreciation as India imports considerably of its gold requirement.
In theory, gold rates and equities, in common, share an inverse partnership. When the equity markets are volatile and directionless on account of uncertainties, there is an raise in demand for gold due to investor’s flight to security. Gold is viewed as a single of the safest investment choices and its rates might fluctuate but will under no circumstances be zero.
Does this theory speak to reality? Yes, it does. Talk about the Dotcom bubble, WTC terror attack, or Global Financial Crisis, which started in 2007 and its aftereffects could be observed in the complete planet till late 2011. During the very same time, the gold rates shot up and continued their run till markets stabilized and uncertainties lessened. The recession in the early 2000s in the created nations got the gold rates on the rise.
In the year 2001, the typical gold value per gm was Rs 4,300. It touched Rs 5,700 in 2003 (15 per cent CAGR development). During the 2008 recession, the gold rates shot up considerably. In reality, the S&P BSE Sensex had fallen more than 50 per cent among January 2008 and February 2009, triggering a enormous rise in gold rates, from Rs 10,800 to 14,500, practically a 30 per cent raise in a year. Sounds equivalent. Yes, the existing crisis to has moved equivalent, with the stock market place plunging by additional than 40 per cent, and gold rates increasing more than 30 per cent.
During 2007-2012, gold rose by 22 per cent CAGR, then for the subsequent 5 years, the yellow metal lost considerably of its sheen and largely fell off the investor radar. Come 2020, globally, gold rates scaled $1,900 per ounce, a level which was final observed throughout 2011. On the domestic front, in the month of August, the yellow metal touched a peak of Rs 56,191/10 gram. Even even though the rates have come off highs and gold is presently trading at sub Rs 50,000 levels, gold as a result far has rallied more than 30 % this year, producing it a single of the finest performing asset classes.
The Road Ahead
As lengthy as the uncertainties relating to the pandemic persist, the yellow metal will continue to stay buoyant. However, it is not possible to predict if there is space for a different runaway rally like the a single observed throughout 2020. Since gold acts as a hedge against inflation and uncertainty and provided its inverse correlation with interest prices, there is space for the rates to stay elevated in the occasions ahead. The assumption right here is that the Fed along with other Central banks will continue to retain its existing monetary policy stance and the government will hold up with relief packages as and when essential.
Gold as a element of portfolio
From an investor’s point of view, gold should really be looked at from an asset allocation point of view, as a hedge against monetary assets in a portfolio. The common principle is that a single can allocate ~10-15 per cent of a portfolio towards gold. The optimal allocation in one’s portfolio can be decided on consultation with a monetary advisor.
Investment Options
It is a incredibly nicely documented reality that investors in India are not averse to holding physical gold. But for portfolio purposes, the greater choice would be to contemplate a single amongst the following gold investment automobiles – gold ETFs, gold fund/fund of a fund, or sovereign gold bonds. Of the 3, gold ETFs supply the most flexibility.
When compared to physical gold, Gold ETFs supply some distinct benefits such as significantly less be concerned about storage and theft as it is held in Demat kind, reduced expense of acquisition provided the absence of producing charges, and other connected expenditures. In case the investor is arranging to meet any future requirement of gold, say a wedding, then such an investor can contemplate carrying out a SIP for as low as Rs 1,000 each and every month in Gold Fund of Funds. This will allow the investor to gather gold units more than a period of time.
by Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC