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Dhanteras 2020 | With improving macros and vaccine in sight, what should you do with gold investment?

After the COVID-19 pandemic hit the world and economies across the globe began to falter, gold acquired more shine as investors rushed towards safe-haven assets.
Nov 11, 2020 / 12:41 PM IST

Gold prices have appreciated by a whopping 32 percent since last Diwali and analysts underscore this data should put to rest all the noise about plunging gold demand hurting gold’s prospects in 2020.

After the COVID-19 pandemic hit the world and economies across the globe began to falter, gold acquired more shine as investors rushed towards safe-haven assets.

Now, with economic indicators rising and a vaccine for COVID-19 in the sight, one may wonder if it is the time to trim exposure in gold.

Analysts still keep faith in gold's prospects.

Jharna Agarwal, Head, Anand Rathi Preferred said with most central banks around the globe providing unprecedented liquidity and low-interest rates coupled with economic stimulus, gold is not expected to lose its sheen.

She is cautiously optimistic about gold due to headwinds, including ambiguity around US-China trade relations and Brexit along with the possible economic downturn in the EU.

She added that in the event of a vaccine getting approved, correction in gold prices seems certain. But this could also be looked at as a buying opportunity that may drive demand and prices up after the correction.

Sriram Iyer, Senior Research Analyst at Reliance Securities said while the reports on vaccine development are positive for risky asset classes like equities and currencies and negative for gold, he is cautious over the speed in which the vaccine could be implemented.

"We believe that more tests will be needed, then the approval process which generally takes time, but due to the emergency situation at hand, could be handed out quickly. So, manufacturing and distribution would mean the vaccine, if truly effective, is still months away from mass deployment. We expect the optimism from the vaccine news would linger for some time and then fade away," said Iyer.

Iyer said this will have a limited impact on the longer-term outlook on gold.

Pointing at the US election results, Iyer said he believes that gold will continue to push higher as the democrats will push for a higher stimulus aid package as the vaccine will take time to reach everyone and the economy could continue to struggle.

Kunal Shah, Head of Commodity Research at Nirmal Bang pointed out that the road to sustained recovery is a long process. So far, central banks have infused $13 trillion and more are expected in the coming days.

"We believe investors should start accumulating gold with a 2-3 year horizon. If massive liquidity causes the US inflation to shoot up, gold will go up too and in case things look grim, then too gold will go up," Shah said.

Anuj Gupta- DVP- Commodities and Currencies Research, Angel Broking is of the view that now the development of the coronavirus vaccine and the end of US election uncertainty support global growth.

"Currently, we are expecting some correction in gold prices on the reaction of the new development. As far as the concern about the investment in gold, we are recommending a buy in gold for a longer time horizon at least for 5 to 7 years. Investors can go to invest in gold in a systematic way like SIPs," Gupta said.

Chirag Mehta, Senior Fund Manager, Quantum AMC believes the trend of investment flows into the asset class is likely to continue well into next year supporting gold prices.

"That's because the COVID-19 pandemic is far from over, we are in the midst of a deep global recession, central banks are injecting liquidity and purchasing assets, interest rates globally continue to stay low, government debts and deficits are inching up, the threat of inflation is looming, currencies continue to be debased and geo-political tensions are rife," Mehta said.

"Gold, because of its characteristic of being a stable form of money with the potential to store value over long time periods and its tendency to appreciate in times of negative real interest rates or when there is a loss of confidence in the economy and monetary system, will benefit as a result of the above macroeconomic circumstances," Mehta added.

On the front of domestic demand, India is likely to see a healthy rebound in gold jewelry consumption over the next year.

"India has about 10 million marriages a year and those would have reduced to just a small fraction this year, most of them postponed. As the economy opens up and more marriages take place, demand for gold should rebound. A better monsoon and the upcoming festive season should further aid the uptick in gold demand," Mehta pointed out.

Ideal portfolio size

Analysts and experts advise one should invest in gold as per one's risk appetite and an ideal size may vary from 10 percent to 30 percent.

Agarwal of Anand Rathi Preferred recommends an allocation of 5-10 percent of the overall portfolio depending on the risk profile (higher allocation for conservative investors).

Iyer of Reliance Securities recommends continuing their existing portfolio in gold. "Probably additional investment could be added for those who want to or afford to," he said.

Shah of Nirmal Bang recommends one should have 10 percent of the portfolio allocated to gold.

Gupta of Angel Broking is of the view that one can diversify one's portfolio 20 percent to 30 percent in gold.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Nov 11, 2020 12:41 pm
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