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Gold still under-owned; 60-40 allocation to equity-debt no more dependable: Chirag Mehta of Quantum MF

When dollar depreciates gold gains. The dollar has lost 4.4 percent in July and hit a two-year low, in turn pushing up the price of gold

August 09, 2020 / 12:54 PM IST

Despite Gold Exchange-Traded Funds (ETFs) receiving record inflows in 2020, greater than any previous full year, gold remains an under-owned asset, Chirag Mehta, Senior Fund Manager, Alternative Investments, Quantum Mutual Fund to Moneycontrol.

Gold-backed exchange-traded funds registered eighth consecutive month of positive flows, adding 166 tonnes in July - equivalent to $9.7 billion or 4 percent of assets under management (AUMs), according to the World Gold Council.

Global holdings have touched an new all-time high of 3,785 tonnes and the price of gold hit a record high of 1,976 dollars per ounce by the July-end, leaving global AUMs standing at $239 billion.

Gold ETFs are units representing physical gold, which may be in paper or dematerialized form. These units are traded on the exchange like a single stock of any company.

“Market share of Gold ETFs compared to all ETF assets jumped from 3-8 percent in the aftermath of the global financial crisis before dwindling to 1 percent levels in the following years. The current figure stands at 3 percent indicating significant potential for Gold ETF asset expansion going forward. Another indicator of under-ownership of the metal is that global allocation to gold stands at only 2.5 percent, a figure far-flung from the ideal allocation of 10-15 percent,” said Mehta.

Mehta feels, that even a small uptick in portfolio allocation to the asset class may translate into significant price appreciation for gold in the time to come.

60-40 asset allocations are not dependable anymore.

In the pre-pandemic world, Mehta said bonds supported when equities fell but his might not be true in the future, making it imperative to revisit a longstanding investment tenet of investing 60 percent in equities and 40 percent in debt. So far, the use of bonds was done as a diversification tool against equities.

“Central banks continued to remain accommodative for six years after the Global financial crisis of 2008 and the current  scenario is many times more severe than that. This tells us that monetary and fiscal policies around the world will continue to be accommodative to boost GDP growth for the next few years,” Mehta said.

He pointed out that as per the IMF, global public debt is expected to exceed 100 percent of GDP in 2020–21, up from 80 percent last year. And the average fiscal deficit is expected to touch 14 percent of GDP in 2020, up from 4 percent last year.

“This is an unprecedented rise, and there is more coming. Low debt servicing costs are the only way to manage these debt levels that have grown too large to be managed,” Mehta said.

Thus, he feels, bond yields and short-term interest rates are bound to stay low for the foreseeable future. In addition, the potential for bond price appreciation is not much considering that rates are at all-time lows already. Both these things are expected to reduce bond returns and increase gold’s portfolio utility, Mehta said.

Gold Outlook

On Aug 7, gold futures on MCX (Multi Commodity Exchange of India) closed at Rs 54,789 per 10 grams. On the same day, the yellow metal had touched a new all-time high of Rs 56,191 per 10 grams.

Mehta agreed that gold is indeed trading in uncharted territory. But he feels, that given that the long-term outlook is supportive for the metal with governments struggling with rising deficits and unsustainable debts, investors can make a strategic allocation to gold because it is a counterweight to paper money which is continuing to lose credibility as a store of value.

He further added that any temporary pullbacks will be a good buying opportunity to build up your 10-15 percent allocation.

Mehta said that when dollar depreciates gold gains. The dollar has lost 4.4 percent in July and hit a two-year low, in turn pushing up the price of gold.

“Gold being a relatively risk-free asset and the currency of last resort, will benefit from a protracted economic deceleration in the US, sharp increase in inflation, debasing of the dollar and low/negative real US interest rates. If the U.S were to adopt negative nominal rates as they implement the Modern Monetary Theory, this could just accelerate the decline in dollar’s value,” Mehta said.

Himadri Buch
Himadri Buch
first published: Aug 9, 2020 12:54 pm