2020 has been a painful year for all of us till now (no need to mention the reason). However, amidst all the difficulties there has been a ray of sunshine especially for the stock markets enthusiasts, be it, investors or fund managers (of course those who could catch up to the opportunity). i.e. the prolific rally in two asset classes: Equities & Gold. Both these asset classes have delivered handsome returns to investors in a timeframe of fewer than 4 months; ~20 per cent for GOLD and ~30 per cent for EQUITY (Nifty50).
In this article, we will focus on the current and future prospects of GOLD as an investment avenue.
Firstly, let us understand why GOLD has had a dream run because many of us might be wondering that there has been a massive demand destruction on the discretionary side owing to the COVID pandemic, and as such who on earth is going to buy jewellery or any other gold item. Keeping this in mind, prices of GOLD should have been on a southward journey? Right?
NO. To your surprise, three days back GOLD touched an all-time high of ₹51,500/10gm in the spot market and is in close proximity to reach all-time high levels internationally.
The following factors were behind the GOLD’s stellar rally:
Linkage to International Prices – Internationally, gold prices are on the rise because of its tag of “safe haven” in difficult times. And since domestic prices have a linkage with international prices, they have risen too
Accumulation by fund houses across countries – At a time when interest rates across countries are abysmally low or negative in some case coupled with a bleak economic outlook that has cast a dark shadow on companies’ prospects, it makes sense for fund houses to park their money elsewhere for generating returns. Fund houses across the US and Europe have followed suit by piling up gold during these tough times resulting in 18% surge in demand for the precious metal. The behaviour has almost been an encore of what they did in 2009 after the global financial crisis.
Now the moot question – How long will the gold rally last?
In the short term, there are a host of events which can keep the prices of gold buoyant and might even take it to a fresh all-time high; rising Coronavirus infections with a possibility of a second wave, geopolitical tensions between US-China, China-India and US Presidential elections in November to name a few.
But does this mean we should stock up the yellow metal for a holding period ranging from 3-5 years?
Let’s take the example of the year 2011 – The year in which gold reached an all-time high of $1920/oz and ₹26,400/10gm, both internationally and domestically, owing to economic issues around the world.
But what happened after that? India’s GDP growth recovered from 5.24 per cent in 2011 to 8.17 per cent in 2016, while gold prices remained almost flat during the period (₹28,623.50/10gm in 2016).
We all are familiar with this quote: “This too shall pass”. So, the COVID-2019 pandemic will pass too. It can’t stay here for years or else we will have to live with it.
Recently, there has been a stupendous advancement in R&D particularly for the development of a vaccine. What if the vaccine comes way before than projected? Will gold still shine?
Secondly, the geopolitical tensions and US presidential elections, can’t keep gold afloat at all-time high levels for too long.
All of us are praying for a quick arrival of vaccine and COVID-2019 to go. If things materialize, then the so-called “safe haven” might lose its sheen similarly like it did after 2011. We believe that although there are enough triggers for some more upside in GOLD in the short term, for the long term it would be prudent for investors to wait for a correction and then ride on the GOLD-RUN. Till then enjoy any short term investment opportunity as far as gold is concerned.
Keep sharing the rare #rare4share, See you next time soon. Till then take care and stay safe!