July 29, 2020

Should you Invest in Gold right now?

By Roy
When chips are down, go Gold.

After this strong rally, should I still invest in Gold? ‘The past performance is not guarantee of the future returns’ is a standard disclaimer used in the investing world. People invest in different asset classes to generate higher returns and past performance remains a key factor in that analysis.  The Covid pandemic has changed many equations of the world and when life style changes, the investment behavior also changes. historically it has been seen that in the times of catastrophe the yellow metal, the Gold, shines. This time around it was not different. the Asset class of the distressed time, came to the fore and dominated business headlines.

But this time around Gold was not alone. Silver, the white metal, ran toe to toe with Gold and to a certain extent outperformed. Since March, Gold has rallied more than 33%. in 16th March Gold contracts in MCX was trading at 39500, now Gold future contracts of the month of August is trading at 52650. But the real show stopper is the silver. from the lows of the March, the white metal rallied more than 83%. The September future contracts of the silver in MCX is trading that 65300.

There are some strong underlying factors leading to that really in Gold and silver. Let us discuss one by one.

Why is the Rally:

Gold is perceived as a hedging instrument and used for diversification of the portfolio. Historically it has been seen, the yellow metal shines with falling US dollar. When pandemic sent shock-waves through the investing community during the month of February and March, the investors panicked and they scampered for liquidity. There was a sharp correction in equity and debt prices and world central banks rushed to monetary easing policies. As things eased a bit, investors opted for the safest haven of all asset class, the Gold. It pushed the price of the yellow metal northwards. 

The future of equity is uncertain and the debt carries an inherent credit risk. In this situation, when the market is flooded with liquidity, investors and Central banks have opted for Gold ETFs and Gold bonds.

The chart shows the correlation between real yield and Gold prices.

Source: Lombard Odier Article, 20th July

Real yield means inflation adjusted yield.

With all those demands piling up, it was not duly met by the supply due ongoing Covid crisis. Many mines of Gold and silver was shut. This mining disruption has created a supply bottleneck.

As the US China banter goes on, it seems like the rally in the Gold is for is far from over. Silver had a quick sharp rally and it may get exhausted for the time being. 2020 being an USA election year, interest rate hike by the US fed is a distant dream. So, the Gold can remain the darling of the investors for the time to come.

How to invest in Gold?

The uncertainty of the pandemic still looming large over all economics, Gold still looks like the safest counter. Everyone’s portfolio should have a certain amount of exposure towards Gold. Indians are known to be one of the largest holders of domestic Gold jewelry. But if someone looking to invest in Gold jewelry, I guess, it is not the right way. Because there is a certain amount of emotion is attached with it and there is storage cost and security concerns as well. if I cannot sell an asset when the price increases and realise its value then it is not an asset for me, just a consumption commodity. There are better ways to invest in Gold and one of the best ways to invest in Gold is through Sovereign Gold Bond. With Sovereign Gold Bond investors tend to get the benefit of the price appreciation in Gold over long time and it also pays you a regular yield. The other way to invest in Gold is through Gold ETFs. Most of mutual funds have their own their Gold ETF. It is better to hold the yellow matter in the dematerialised form as it neutralizes the holding cost.

Will the rally continue?

As we observe the world political environment, it seems big countries are opting to outdo each other in terms of trade relationships. Biggest world central banks are trying to de-link their Forex reserves from US dollar and they are left with no option but to hold the precious yellow matter as their reserve. It will continue to boost the demand for the same. in USA the price has just hovering around $2,000 per troy ounce and many brokerage houses are projecting that it will touch $3000 in the days to come

I would like to end the piece with an observation that developed markets are holding more Gold in their Forex reserves and developing markets are holding developed market currencies in their Forex reserves. as I mentioned earlier as the US Dollar falls, the Gold Shines.