Author’s name: Sahni Ish
Author’s affiliation: USME, Delhi Technological University
Author’s contact info: [email protected]
After a major run in 2018 and 2019, gold prices are weak in the second half of the CY2020. Gold prices have fallen 6.4 percent in the past six months. Experts still say that gold should be an integral part of your portfolio. Here are some reasons why you should not ignore gold.
Triggers and inflation
In economic downturns, governments around the world generally pay money into the financial system. It is a time-tested weapon for policymakers to make funding available to those in need in times of distrust. However, over a period of time, its effectiveness has diminished, so the bigger stimulus has become the order of the day. As the economy is expected to take longer to recover, more stimulus is expected from central bankers around the world, including the United States. This should push the price of gold upwards. But even the simplest money can lead to inflation. Unlike 2008, when a large amount of liquidity is available and enters the real economy, the probability of inflation is greater when the liquidity is mainly provided to banks and financial institutions. Higher inflation and higher fiscal deficits – government spending rather than government revenue – are conducive to the price of gold.
Low or negative actual rates
Against the backdrop of high inflation, fixed income investors are looking for higher interest rates to protect their purchasing power. But the current environment demands lower interest rates. Worldwide, rates are expected to remain low for some time to come. This leads to negative or low real (nominal interest rate minus inflation) interest rates.
While some investors may find gold an attractive investment option to protect their purchasing power, the yellow metal acts as a defence against inflation.
The geo-political risks still exist
The COVID-19 epidemic has pushed many global conflicts into the back-burner. It is expected that some of these will come to the fore as the vaccine may help return to normal. Whatever the Indo-China conflict, geopolitical tensions in the Middle East or the trade war between the US and China, investors cannot ignore them. Joe Biden’s assumption of the presidency of the United States will not end the trade war with China. This issue is expected to become more sophisticated before it is resolved. The uncertainties surrounding it require a quota for gold.
Exaggerated stock markets
As stock prices have risen, investors have seen beautiful returns on stock investments over the past few months. Because the ratings are so steep, the fear that a correction might be made is now ingrained in their minds. Despite the recent revisions, it is difficult for one to invest as the markets are at a high level. Since gold has a negative relationship with equities, it is a good idea to set aside some money for gold to control the negativity of the overall portfolio.
Will the price of gold rise?
The price of gold has been moving sideways for some time now. However, if the big economic situation does not improve materially, the price of gold may strengthen again. Weak global recovery in the post-COVID-19 world, coupled with a low interest rate environment, could provide a seam for yellow metal prices
What do you do?
Financial advisors generally do not recommend gold for higher returns. Your entry time and exit time are important. It rarely happens.
A great approach to going into your property allocation. Invest up to 10 percent gold in your portfolio. Invest in gold exchange trading funds or sovereign gold bonds or a combination of both. It should serve the purpose of supporting your portfolio in unstable times. If gold does better than expected, you will also get a return kick. However, the expectation is that gold will match inflation for many years.