Amid the COVID-19 pandemic and uncertainties around economies recovering, gold and silver have been shining bright this year, as investors rushed to stock up the safe haven asset. However, after gold prices last week topped Rs 56,000 per 10 gram in India, there has been a sharp correction this week, tracking the global volatility in price of the precious metals. Prathamesh Mallya, AVP—Research, non-agri commodities and currencies, at Angel Broking tells THE WEEK the rally is still not over and given that the world is flush with liquidity pumped by central banks, gold could touch Rs 58,000 per 10 gram levels. Excerpts:
Gold has surged this year as investors flock to the safe haven asset. But how high can it go? It recently breached Rs 56,000 level.
2020 will be remembered in the history of financial markets as the year of precious metals. The pandemic has triggered recession across the global economy and IMF in its recent projections has stated a contraction of 4.9 per cent in 2020. In these uncertain times, it is obvious for investors to move towards safe havens.
Safe havens are something that can retain its value, something that will help you weather the storm. Something like a US Treasury-promissory note issued by the government of the United States of America in exchange for money is one of the best options for global investors.
On the contrary, the yields on the one-year T-Bill have been falling so precipitously that it’s now fast approaching zero. And since there is very little money to be made on arguably the most secure asset on the planet right now, investors are looking elsewhere. Gold fits as a next arguable best asset in times of uncertainty, effective hedge against inflation and an excellent store of value, hence the rise in the value of the precious metal.
Along with gold, silver has also rallied sharply. What's driving its rally?
Alternative investment in a relatively volatile market and a proxy to gold is what defines the investment in this asset class. The movers and shakers for silver prices in the second half of 2020 will be a combination of potent forces of heavy industrial use, investment demand and its strategic importance as a currency hedge during times of uncertainty.
Rising investment demand as witnessed in 2019 and the similar trend to continue in 2020 will ensure that silver prices will rise further from here on. Next possible mark in the Indian markets can be Rs 80,000 per kilo.
Why have gold and silver prices corrected so sharply this week? Does it signal an end to the rally we have had this year?
Price correction in both the metals have been drastic in the past few trading sessions and these corrections have offered a ray of hope for retail as well as physical buyers of the metal. From all-time highs of ($2,063/oz for Comex Gold and $29.83/oz for Comex Silver ) made on August 7, prices have corrected by around 6 per cent to (CMP: $1.924/oz for Comex Gold) and 12 per cent to (CMP: $25.30/oz) for Comex Silver.
Encouraging PPI (Producer Price Index) numbers released from the US, and hopes of a new coronavirus relief package boosted the S&P index to record highs. The flavour of the season is returning back to equities with risk appetite of investors increasing. Hence, the drastic correction in both gold and silver prices.
The rally, though, is not over yet. With the amount of liquidity that is flushed by the central banks across the globe, the rally will extend further towards Rs 58,000/ 10 gram for MCX Gold and 72,000/ kilo for MCX Silver (MCX Gold CMP Rs 52,000 per 10 gram and MCX Silver futures CMP: Rs 66,681 as on August 13).
Would you still recommend buying gold at these levels or book profits partially, at least?
Booking profits at these levels is advisable for those who want to take profits off the table. For physical buyers, it is better to wait for some more time, to bargain buy the metal at lower prices rather than entering at elevated levels.
Financial advisors usually recommend holding gold (5-15 per cent) in a diversified portfolio. Should one now consider silver too, considering silver is always much more in demand due to industrial usage?
The ideal gold allocation in any portfolio should be around 10 per cent. However, taking into consideration the uncertain global economy, the allocation should be increased to 15 per cent.
Additionally, silver has been moving relatively faster in comparison to gold, in order to balance the portfolio, an extra allocation of 7 per cent should be allocated in silver.