As risk appetite of investors improves, should you change your strategy for gold?

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Even though it may be too early to say so, major markets across the globe are showing signs of returning risk appetite.

As per Reuters, Nasdaq hit a record high close on Monday, becoming the first of Wall Street’s three main indexes to bounce back from the market crash caused by the pandemic.

Easing lockdown, hopes of stimulus and bargain-hunting are keeping the stock market in the higher orbit.

It is good to see riskier equities gaining momentum, but there is a risk that the rise in investors' risk appetite may take away some shine off gold.

The reopening of economies globally could see the safe-haven appeal for the metals reduce. Upbeat and surprising economic data over the last few days in the United States boosted optimism about economic recovery and have also weighed on prices.

Should we take a relook at our strategies for gold?

Gold will continue to shine with some short-term correction

Experts point out that gold's safety factor is as strong as ever.

The yellow metal has been witnessing some profit-booking of late but the recent correction cannot be said to be bearish for gold.

"MCX gold has rallied by approx 18 percent in the 2020 year to date hence it can be said to be a healthy correction in the bull market, a buying opportunity," said Naveen Mathur, Director of Commodities and Currencies, Anand Rathi Shares and Stock Brokers.

"A rally in equities has removed some sheen from gold, leaving some to wonder if the gold bull is dying. But while worries over the US economic outlook are dwindling, worries over the US and global social unrest have emerged to keep gold’s safety factor intact," Mathur said.

Mathur believes continued central bank stimulus is another bullish factor for the metal along with a weakening dollar which should help push gold above its recent trading range. Election year for the US is another positive push for the yellow metal for the second half of the year.

"In the next 3 to 4 months, MCX gold is all set to touch resistance levels of Rs 47,980 and 48,750. Gold may approach a psychological target of Rs 50,000 before the US election (November 1st Week)," Mathur said.

Not much has changed for gold. The uncertainty about global and domestic economies in the wake of the outbreak of the pandemic and the increasing number of coronavirus cases will keep gold in the radar of investors as the safe-haven asset.

Prathamesh Mallya, Chief Analyst - Non Agri Commodities and Currencies, Angel Broking is of the view that gold will be a part of investors' portfolio given its double-digit returns in the first half of 2020.

"It has still room for further increase in the second half of the year. China and the USA tensions still continue to be a trouble maker for global stability and gold will be a good performer in these uncertain times," Mallya highlighted.

He expects gold prices to move higher towards $1,850/oz in the international markets and Rs 50,000 per 10 gram on the MCX futures from a 4-month perspective.

On the flip side, Dharmesh Shah, Head – Technical, ICICI direct believes gold may see some correction in the near-term.

"We expect gold prices to consolidate over the coming few months in the broad range of $1,550-1,750 per ounce after strong gains in the last two months," Shah said.

"While immediate upsides are capped at $1,780 per ounce which is 80 percent retracement of entire 2011 – 2015 decline ($1,920-1,046 per ounce), strong support exists around $1,550 per ounce which is current quarter low and a higher base formation," Shah said.

Sriram Iyer, Senior Research Analyst at Reliance Securities also expects more correction for gold and silver in the short-term.

"Internationally, gold prices could correct by 5-6 percent from $1,700 levels. Near-term support is $1,670-$1,680 levels which could hold temporarily. Gold might continue to see pressure below $1,690 levels where a downside move could take prices up to $1,646-$1,607 level," Iyer said.

However, he believes that the quantitative easing from all the major central banks and low rates could continue to see investors remain invested in gold.

"After the correction, we see prices resume their bullish momentum after a short period of consolidation near its support levels. We could see gold move higher with good volume activity above $1,725 and witness further bullish trend up to 4-5 percent around $1,748-$1,765 levels," Iyer said.

Hareesh V, Head Commodity Research at Geojit Financial Services also believes gold will continue with its broad positive outlook.

"Due to its special appeal as a safe-haven during periods of economic stress, gold’s demand continues to be on the higher side. The unsolved trade tensions between US-China and political unrest in many countries will also provide lower-level support to the commodity. However, at the same time, any immediate economic recovery is likely to halt major gains in the commodity," he said.

"As far as levels are concerned, in the international market gold may edge higher to $1,765, followed by $1,820 levels. Major support is seen at $1,595. In the domestic market, as long as Rs 44,700 is held, expect upticks to continue towards Rs 50,000 per ten grams," he added.

Ideal size in the portfolio

Pankaj Pandey, Head – Research, ICICI direct points out that for Indian investors, gold has been an effective asset class from a diversification perspective as apart from global price movement, rupee depreciation has helped it deliver better returns.

"Holding some portion of the portfolio in gold provides effective diversification. Gold should be viewed as an allocation strategy rather than an alpha-generating or absolute return asset class," Pandey said.

The investment in gold should depend on your risk appetite and how you perceive the economic condition and other factors that can steer the prices of gold.

Iyer of Reliance Securities is of the view that gold's ideal size in one's portfolio can be anywhere between 5-8 percent. However, he added that every investor has a different risk appetite and should look to model his/her portfolio accordingly.

Mathur of Anand Rathi is of the view that 8-10 percent of the overall portfolio should be invested in gold.

Mallya of Angel Broking believes an ideal investment size should be at least 10 percent allocation of the total portfolio, given the global uncertainty at this point, the allocation should be increased to 15 percent of the portfolio.

Hareesh V of Geojit Financial Services said 10-15 percent of one's portfolio in gold is considered as ideal.

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