Should I Invest in Gold Now?

Strategic Allocation to Gold Amid Coronavirus Uncertainty

Introduction

Should I invest in Gold now? Many investors must be thinking of the same with the recent 35-40% market crash since January 2020 and 46% returns from Gold investment in last 1 year. You can have a strategic allocation to Gold in your portfolio amid current Coronavirus uncertainties. Experts believe that the fears and uncertainty of an economic recession due to coronavirus scare is driving the gold prices up.

Should I Invest in Gold Now?

Gold Prices At 7-year High

• Gold prices rose to a more than 7-year high. Spot gold touched $1,724.72 per ounce. The last highest point was in February when gold touched $1690/ per ounce.
• The precious metal is up 11% in April, its best month since 2011. Gold has reached those levels not seen in nearly last 7 years.
• Gold Prices could reach $2,000 in 2020. Currently, Gold prices are hovering between $1,700 to $1,750. A move to $2,000 represents 13% upside and would take gold to record highs.
• Gold would be at around Rs.50,000-55,000 per 10 gram in Rupee term by the end of 2020. The prices are likely to shoot up with the fear, speculation and uncertainty around the current economic situation.
• The massive liquidity injected by the Central Banks and Governments all over the world will definitely support equities. However, this fiscal stimulus is also going to impart a great momentum to Gold.
• Despite slight volatility, gold funds managed to offer a whopping returns :
  • 11.43% returns in the last one month
  • 18.51% in three months
  • 46.46% returns in one year

Key Reasons for Rising Gold Prices

1. Recession Fears

• The stock market has been declining since January 2020, taken a big hit amid the coronavirus outbreak across the world. It took time for the equity market to realize the implications of the virus and these implications economically are uncertain. 
• It is true, the recent stock market correction can be a good entry point for investors to accumulate long-term positions. However, the macroeconomic backdrop has become increasingly favourable for Gold currently.
• The entire world is currently staring at virus induced economic deceleration. These Recession Fears are expected to encourage a rotation of money from risky assets like stocks and bonds to defensive assets like Gold.
• In the recession during 2008 Financial Crisis, Gold prices had given a great returns. So, as an safe asset class, Gold prices are rising consistently amidst current Coronavirus uncertainties and recession fears.

2. Gold as an Alternative to USD Reserves

Many investors across the world are opting for investing in Gold as an alternative to USD reserves. It is because Gold is also perceived as a good bet for reserves like USD reserves.

3. Rising Gold Speculation by China & Russia

• We know, USD is the most dominant currency across the world. Many countries’s (even India) are having their Forex Reserves in USD terms.
• With rising dominance of US currency USD, China and Russia are attempting to have great speculation over Gold prices to replace Forex reserves from USD with rising Gold asset value. So, there can be their speculative driving force towards rising gold prices amid current uncertain scenarios.

Gold Standard

• It is a monetary system used before 1930, in which the value of a currency was defined in terms of Gold.
• In this system of Gold Standard, the Currency Printing was backed by ‘Gold’.
• However, Gold Standard was abandoned in UK in 1931, in US in 1933 and completely abandoned all over the world in 1973.
• While opting out from Gold standard, Countries had to keep in check in the inflation level, while printing their country’s currency.
• Because if the currency got over-printed, it will result into the depreciation of that country’s currency in the global context. Thus, over-printing of currency would result into the rising Inflation.

Experts believe that the fears and uncertainty of an economic recession due to coronavirus scare is driving the gold prices up. Should you Invest in Gold now?

What Indian Investors Should Do while Investing in Gold?

Have Strategic Allocation to ‘Gold’ Amid COVID Uncertainty

• Nifty as well as Sensex have crashed by almost 35-40% from their all-time highs in January 2020. The interest rates on Fixed Income Products, Fixed Deposits, Small Savings Schemes are trending down with the declining Repo Rates.
• So, the investors must look at asset allocation which will help them to take strategic calls in the portfolio. Instead of being fully invested in equity or debt, an investor must have a diversified portfolio across asset classes such as equity, debt, gold.
• Gold can prove to be a safe-haven asset class amid current COVID-19 uncertainties. Investors can have maximum up to 10-15% allocation to gold in their total portfolio. You can consider increasing portfolio allocation depending on your risk tolerance and comfortability.
• Most Indians prefer to invest in the precious metal – Gold in the physical form. Sovereign Gold Bond (SGB), Gold Exchange Traded funds (ETFs) of mutual funds are the efficient ways to invest in Gold. These products can allow you to diversify your investment portfolio.

Use ‘Gold’ for Diversification

• A strategic allocation to Gold will help in attaining a good diversification in your portfolio. Gold prices are rising as various central banks across the world have announced large-scale quantitative easing measures.
• As a result, Gold has become a risk-free asset to hold. And its rising prices are indicating that global worries are still intact. For an individual investor, investment in Gold is a useful diversification tool.
• As we have mentioned in above point, you should limit Gold allocation maximum up to 10-15% of the total portfolio. It is because, the rush to safety assets such as gold could fade as markets stabilize and starts recovering.
• One should always remember one important thing – Use Gold for Diversification and not for Hedging.
• Multi-asset funds of mutual funds can be a good option for asset allocation mix as they invest in a combination of Equity, Debt and Gold ETFs. Here, Gold is a good diversifIer. Key advantages of multi-asset funds is the higher returns from a particular asset class can offset poor returns from another class.

2 Reasons for Potential Upside in Gold Prices (in Rupee terms)

1. Current Gold Prices per Ounce in $-terms are at around $1,700-1,750. Whereas, All Time High is at $1,900. Also, it is expected that Gold could attain $2,000 per once level by the end of 2020. So, there is almost 13% potential upside in Gold prices.
2. Amidst the current rising demand for Dollars over coming uncertainties, the Indian Rupee is depreciating against USD amid Coronavirus Outbreak. This depreciation in Rupee with rising Dollar and Gold demands will uplift Gold prices (in Rupee terms)

Conclusion

• For long-term investing, investors must have pre-requisite goals in mind. And their decisions should be based on building a portfolio that will help them achieve these goals.
• Investors must realise that market volatility is your friend in a goal-based investment with a multi-year time horizon.
• We all are currently looking towards and forward to the eventual recovery. Do always remember, over the longer run, Equity is always a better bet here than Gold.