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Tune in on 17th July for the Small Business Virtual Summit with Cisco. Register now!
Last Updated : Jun 20, 2020 06:01 PM IST | Source: Moneycontrol.com

Safe haven gold a good bet during volatility, uncertain times

Investors have evinced more interest in Gold ETF holdings which can be sold anytime on listed exchange or through the mutual fund company.


With volatility in equity market investors have found solace in safe haven gold exchange-traded funds or Gold ETFs.


This is evident from the data on Association of Mutual Funds in India. It shows that gold ETFs have received inflows of Rs 815 crore in May 2020 higher than Rs 731 crore in April 2020.


In March, this category had witnessed outflows of nearly Rs 200 crore.


Gold-backed ETFs are passive investment instruments that are based on price movements and investments in physical gold. 


Investors have evinced more interest in Gold ETF holdings which can be sold anytime on listed exchange or through the mutual fund company.


Volatility in equity markets have proved to be beneficial for gold ETFs.

After falling sharply in March to a low, the equity market recovered some ground in April on hopes of stimulus package to cope with the economic impact of coronavirus outbreak. But in May, indices once again turned negative despite boost from RBI and the goverment.

Sensex lost nearly 4 percent and the Nifty50 corrected close to 3 percent in May.

Close
The stimulus package of around Rs 21 lakh crore announced by Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman failed to cheer the market as it focussed more on supply side than demand.

Also, the rising number of COVID-19 cases keep investors on wait and watch mode.


Returns in Gold Investments


In futures market, gold prices in India was up around 20 percent so far this year.


Gold prices in Bullion market were ruling at Rs 3800 for 22 carat and Rs 3990 for 24 carat per 100 grams in end December 2019. These have increased to Rs 4,500 for 22 carat and Rs 4,900 for 24 carat per 100 grams as on May end, 2020, an overall appreciation of approx 20 percent plus. 


“Price of Gold including Gold ETFs are based on London bullion Gold that's valued in US Dollars. USD appreciating against rupee is also adding to Gold price appreciation .The yellow metal continues to shine,” said Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum Mutual Fund.


The Indian rupee continues to depreciate against the US dollar as foreign investors flee Indian markets.  In May, the Indian unit dropped by 10 paise to close at 75.62 against the dollar.

International gold price is converted to Indian gold price using the prevailing Rupee-Dollar rate. Thus, a depreciating rupee has pushed up gold prices in India.


Indian populace has a general fascination of commodity gold in forms of jewellery, bars and stored wealth. India is largest consumer of Gold jewellery, globally. 


“In these times of heightened risk and uncertainty, positions in equities can potentially be hedged by allocating to gold. Gold has historically had low correlation to equities,” Mehta said.


Added to that, the wealth appreciation in gold prices when equity markets are uncertain and challenging due to Covid factor, Gold ETF as paperless Gold holdings are attractive to long term investor and is also a safe haven bet.


S&P 500 quarterly earnings per share have fallen by 13 percent y-o-y. This is in fact the worst collapse since 2009.


Gold outlook


Gold experts believe that macroeconomic backdrop has become favorable for gold. 


“Higher risk and uncertainty combined with lower opportunity cost and competitive debasement of currencies will boost investment demand for gold,” Mehta said.


He also said that in the coming quarters, gold’s behavior will depend on the speed of global economic recovery. The extent of monetary and fiscal stimulus will also be important. 

But over the long term, gold will play a risk diversifying role and investors must use the ongoing correction to build long-term positions in Gold.

First Published on Jun 20, 2020 06:01 pm
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