Gold acts as a risk cover to one's financial holdings and can also be a deemed the last person standing if the world were to come to an end.
Gold has at all times been considered the best of testimonies of good faith... - Rafael Sabatini.
The current run in gold prices quite resonates with this statement.
There seems to be a rush to buy gold – both retail and institutions alike. The dream run in gold has led to high double digit returns across tenors. Thus gold as an asset class seems to be lone star shining and returns of financial asset class like debt and equity seem to be pale in comparison.
For sure there is a reason why we are seeing such moves. For starters, there is a crisis in the medical world, which is being fought by central banks and policy makers across the globe.
The uncertainty surrounding COVID-19 means monetary policies may have to remain accommodative for the foreseeable future. Over 80 central banks have eased rates and are leaving no stone unturned in easing monetary conditions for financial markets stability. We have also seen expansive fiscal policies by both developed as well as emerging economies as revenues get sluggish in the wake of lockdowns.
Bond yields across the globe has seen easing with quite a few parts of developed world in the negative rate territory. It is therefore no surprise that gold seems to be the go to asset class as an attempt to diversify one's portfolios. Even central bankers have been buying gold as part of their reserve holdings.
We have also seen steady growth seen in Gold ETF holdings worldwide, including India. As of May-end, gold ETFs in India had an AUM of around Rs 10,000 crore with around 6 lakh folios. In June 2019, gold ETFs had an AUM of just under Rs 5,000 crore with around 3.27 lakh folios. It is no surprise that an average Indian household owns gold in various forms, much of its value cannot even be estimated! Gold is the lifeblood of the Indian economy – and it appeals to every strata of the Indian society!
That's the key question given that gold was no doubt Student of the year in 2019 and is quite on track for Student of the year 2 in 2020 as well. The excesses created by world central bankers will tend to get inflationary – though with a lag.
Till then, the uncertainty w.r.t. the coronavirus, the risk of sentiment thereof, the precariously perched currencies in some nations are all sufficient fodder to keep gold warmed up for some time to come.
The only worry is rear view driving tendency which leads to investment decisions based on past returns – a recipe for disaster. Gold should form part of one's portfolio till such time one continues to hold any financial asset class.
Gold acts as a risk cover to ones financial holdings and can also be a deemed last person stand if the world were to come to an end. Ownership of such gold is best done in paper form over physical form – gold ETFs, sovereign gold bonds etc.
To summarise - as the Chhichhore behaviour in financial markets unfold, as the war of currencies continue, one could seem the gold continue its Mission Mangal march?
The author is Chief Investment Officer (Debt) & Head Products at Kotak Mahindra Asset Management Company.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.