That thing that has been glittering in your portfolio in this past one year is gold. Prices of gold have appreciated to Rs 49, 240 for 10 gram in spot market – registering a spike of 41 per cent in year ended 9 July 2020.
Rising gold prices has been attracting investors’ attention for quite some time now. In uncertain times when other asset classes such as stocks and real estate move south, investors find it difficult to look away from yellow metal. The question is: should you buy more gold or have gold prices peaked?
Why have gold prices gone up?
Gold does well when the uncertainty, around us, goes up. And the year of 2020 has been extremely uncertain all along the way. Lockdowns to contain the spread of Covid-19 pandemic has led to unprecedented fears of a slowdown in global economy. Impending American President’s election and trade dispute between China and USA have accentuated uncertainty. Geo-political risks such as tensions between China and India increase the risk perception of investors. Another key driver for gold prices, is the unprecedented increase in money supply in the global economy. Infusion of liquidity has led to lower interest rates – near zero in developed economies, which has made investors consider investments in gold.
Money comes into gold
Globally investors are loading up on gold. Exchange traded funds (ETF) backed by gold have seen highest ever holdings of gold in June 2020 at 3, 621 tonnes, as per latest data released by World Gold Council. In the first half of calendar year 2020, global net inflows in gold ETF stood at 734 tonne valued at $39.5 billion. This is significantly higher than annual inflows registered in tonnage terms of 646 tonnes in 2009 and US dollar 23 billion in value terms in 2016. Indian investors are also catching up with investments in gold. According to monthly data released by Association of Mutual Funds in India, net inflows in gold ETFs stood at Rs 2, 040 crore in first quarter of financial year started on April 1, 2020. Since January 12, 2010 2020the investors have poured Rs 3, 530 crore in gold ETF. Gold ETF track the prices of gold, and have delivered 41.6 per cent returns over one year ended July 9, 2020, as per Value Research.
How long will the good times for gold last?
Though gold has done well in the past and investors are chasing it, you have to be prudent with your allocation to gold. Demand for physical gold (jewellery and bullion) has collapsed due to loss of income and unemployment of end users in key markets. You should not extrapolate past returns delivered by gold prices in future. It is better to moderate expectations from gold.
Sumeet Bagadia, Executive Director of Choice Broking expects MCX gold prices to remain bullish and may go up to Rs 55, 000 levels in next 12 to 18 months. Gold futures contract for August month is trading around Rs 48, 900. Gold may see increased volatility as investors realign their gold allocations depending on the outcome of events such as US presidential election and central bankers’ decisions to revive economy. Bagadia expects gold prices to take support at Rs 44200 in case the prices turn weak.
Experts suggest that gold should not be bought to make more returns. Rather, use it as a hedge to bring down your overall portfolio risks. “Investors should not get carried away by recent price performance of gold. Do not load up on gold for returns,” says Ajay Kinjawadekar, founder of Moneysafe Financial Services. He advises restricting exposure to gold up to five per cent of portfolio as a means to hedge; conservative investors can invest a bit more in it. Take exposure to gold through a mix of gold ETF and sovereign gold bonds, he adds.
