Should You Buy Gold at an All-Time High? - Outside View by PersonalFN

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Should You Buy Gold at an All-Time High?
Jul 7, 2020

Gold is making a solid comeback, proving it's still the most important asset to own in the portfolio. The price of gold reached an all-time high, despite the slump in physical gold demand due to the COVID-19 pandemic. Gold indices have crossed Rs 48,000 per 10 gm to inch up towards Rs 50,000 because it's an effective hedge and diversifier against any uncertainty.

Gold jewellery consumption in India has always been high because it's seen as a store of value and traditionally a part of the family heirloom.

However, there are lot of issues pertaining to physical gold, such as gauging purity, different vendors offering different prices, lack of having secure storage facility, and the disappointment at the resale price of gold investors are offered.

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Investors have recognised that gold's true worth is not restricted to physical gold, but as a hedge and portfolio diversifier to preserve investors' wealth over the long period. Thus, rallying gold prices when the rupee depreciates, the economy is spiralling downwards, ongoing geopolitical tensions, interest rates dropped to ease inflation pressure, and accommodative monetary policy stance are favourable factors to invest in gold in non-physical form.

Graph 1: Gold prices rallying up

Recently as reported by the Business Standard, "According to Metal Focus, a leading precious metals consultancy, jewellery demand is likely to fall 36 per cent to just 348 tonne in 2020, the lowest in a decade. It said the rural economy, which is better placed, and low-key weddings are likely to drive jewellery buying."

But the major buying opportunities that generally boost the retail jewellery demand are down due to the prolonged pandemic situation as the imports have taken a beating, as seen in the chart below.

Graph 2: Muted Jewellery demand

Investing in Gold in the current situation seems worthwhile as the pandemic situation is still one of the biggest threats affecting the overall economy. So in terms of investment, equity market is volatile, debt market yield is low, and regarding the monetary policy, a further rate cut cannot be ruled out.

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Since gold has a negative correlation with other assets during risk-off periods, protecting the investors' capital against tail risks and other events that have an adverse impact on capital or wealth, it must be included in the investment portfolio. When economic conditions are benign (like current times), there is slow consumer growth and inflationary pressure; which works in gold's favour.

Smart investors took this opportunity to invest in gold ETFs recognising its trait of being a haven, a store of value in times when the world is staring at economic uncertainty (caused by the COVID-19 pandemic) and fear of a global recession looms large --- probably worse than the Global Financial Crisis of 2008. In India, the AUM of gold ETFs continued to witness a rise and so did the folio.

Graph 3: Rise in Gold ETF investment


In my view, the answer is Yes!

You should buy Gold at an All-Time High. Gold will move up amidst uncertain times and with accommodative monetary policy followed, investors should tactically allocate around 10% to15% to gold.

Gold's traditional role as a safe-haven asset means it can demonstrate its qualities during times of high risk. Besides, gold's dual appeal as an investment and a consumer good means it can generate positive returns in good times too.

Investing in gold in paper form can prove to be more effective in the current dynamic of political and economic uncertainty, lower interest rates, and economic concerns surrounding stock and bond markets.

Avoid a speculative approach while investing in gold. Look at it as a portfolio diversifier and a monetary asset (rather than a mere commodity), which can help you reduce the risk to your overall portfolio.

Ideally, invest in gold with a longer investment horizon in the smart way through gold Exchange Traded Funds (ETFs) or gold savings funds.

Remember gold offers an effective hedge during global uncertainty and a shield against inflation. Most importantly in your portfolio, it serves as a diversifier.

Author: Aditi Murkute

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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Aug 7, 2020 (Close)