Metal dictator

Gold reigns supreme in an uncertain economy; but invest in it carefully

GLOBAL-MARKETS/ REUTERS

Gold, almost as a rule, gains when there is an uncertainty in the economy. The economic turmoil triggered by the pandemic has been no exception. On July 27, gold prices hit a new high of $1,944 an ounce, beating the previous record of $1,921 in 2011. So far in 2020, global gold prices have surged 27 per cent. Spot gold prices in India topped 052,000 for 10 grams on July 27. In rupee terms, gold has rallied 28 per cent this year, on top of the 25 per cent rally it had in 2019.

“The rally in gold is ferocious and we are seeing a relentless demand for the safety from coronavirus turmoil,” said Rahul Gupta, head of research (currency) at Emkay Global Financial Services. “The political decisions to increase stimulus packages is keeping gold prices higher.”

Over the past few months, central banks around the world have slashed interest rates. In many developed economies, they are currently near zero. The stimulus signals in the US is more pain ahead for investors and that is making them rush to gold. In the Indian market, the depreciation in rupee also weighs on gold prices. “Weak macro indicators, global uncertainties due to trade war, geopolitical tensions, fears of global slowdown and a U-turn in monetary policy stance by the US Federal Reserve augured well for gold prices,” said Dhiraj Relli, managing director and CEO, HDFC Securities.

In the first six months of 2020, global gold exchange traded funds saw inflows of $39.5 billion. In India, much of the gold is held in physical form. Indian Gold ETFs saw inflows of Rs2,040 crore in April-June, taking their total assets under management to Rs10,857.44 crore.

Experts say gold prices could rally further over the next few months. “The overall situation remains supportive for gold,” said Anuj Gupta, deputy vice-president (commodities and currencies research), Angel Broking. “Till Diwali, gold may test $2,000 an ounce and in the domestic market we are expecting around Rs53,000-Rs54,000 per 10 gram level. My recommendation is to book some profit; if someone holds gold, then she could book profit on 30-40 per cent of the holding.”

Compared with fixed income instruments, on an average, gold has done 2-3 per cent better in the past 20 years. But this might not be the time to invest in gold because the risk reward is not in favour. “Gold may go up another 5 per cent or maybe 10 per cent. But, small investors are not going to exit when gold goes up 5-10 per cent. This Covid-19 will be a thing of the past maybe in eight or 12 months and when the economic rebound happens, assets like gold, which don’t serve any productive purposes, will come down,” said Raghvendra Nath, managing director of Ladderup Wealth Management.

Experts say that there would be long periods of underperformance by gold. For instance, the last time gold topped $1,900 per ounce was in 2011. If one had invested at that peak, he hardly has made any money in the nine-year period that followed.

One can invest in gold by buying the physical metal or buying digital gold through platforms like Paytm, MMTC-Pamp and SafeGold. There are also gold ETFs and gold funds that are offered by mutual fund houses. The sovereign gold bonds are a good bet, considering that these bonds offer an annual interest of 2.50 per cent, which can act as a hedge when the investment underperforms.