“In the short term and medium term we do not expect gold to rally and exposure should be only for diversification purposes this year. Indian equity markets are also expected to underperform this year given the phenomenal returns over last year."
The BSE Sensex hit a new high of 36373.44 on Wednesday before sliding below its previous day’s close, while Gold hit a 5-month low of Rs 30,800 per 10 gram in the domestic market. In the international market, gold prices have been under pressure due to rising global concerns, including issues on Brexit and strengthening dollar.
Against this background, what is a better investment bet – stocks or the yellow metal? Rahul Agarwal, Director, Wealth Discovery/EZ Wealth, feels there could be risk in both in the coming months and advises caution. Here are excerpts from his interview:
What are the global and domestic factors that will determine gold price in coming months?
Gold is considered to be a safe haven asset and a hedge against inflation however recent trends are to the contrary. Even with heightened geo-political un-certainty gold prices have not firmed up. In fact, gold prices have been down for the year. A robust US economy, firming of the US interest rate regime and the consequent strength in the US dollar has been mostly responsible for the slide in the global gold prices. As shown in the following chart, there is a very strong negative correlation between gold prices and US Dollar. The chart compares the daily LBMA fix gold price with the daily closing price for the broad trade-weighted US dollar index in 2018, and if the trend continues with further strengthening of the US dollar we can expect the gold prices to remain subdued.
Gold supplies remain at elevated levels. For the year-end 2017 supply was 9,038 ton against a demand of 8,496 ton. For the first quarter of 2018 the demand continued to remain weak. Looking at various factors we do not see a bull case for gold. The only scenario where we expect gold to outperform would be the one in which the current tariff wars impacting US economy negatively and consequently the weakening of US economy and hence the US dollar. Another possible bull scenario for the gold prices would be one where the Central banks around the world dump their US dollar reserves in favor of gold but that would be a long-term phenomenon. In the short term gold prices are expected to remain under pressure and the ongoing tariff wars and its consequences globally would determine the trajectory of the Gold in the short and near term.
What are your price targets for gold?
Gold has traded in a range in the April-June quarter; it is believed that this is simply a seasonally weak period for the yellow metal with demand staying sluggish and global supply staying at elevated levels. Over the course of last six months gold returns have been negative by almost 5%. Gold is expected to trade in a range with a negative bias. Currently, we are looking at $1,250 as a major support and if gold prices breach those levels the next support would be around $1,220. As an investment option we do not see a bull case for gold at-least in the near term. In the current context a lot will depend on the global tariff wars and how does it impact global growth. If the US economy continues to show strength in-spite of the tariffs and US interest rates continue to strengthen, we may see a further down side in gold prices.
Is this time to increase gold exposure or should one look at equities which are doing well?
Global Equities have witnessed heightened volatility due to increased geopolitical tensions. In the Indian context, although the benchmark indices have shown modest returns for the year, the broader markets have taken a beating with several mid-cap and small-cap stocks have corrected up to 30-40% over valuation concerns. The strength in the US economy has also led to capital outflows of the emerging markets, including India. Although, gold is a safe haven asset especially at times of uncertainty but this year in-spite of volatility we are witnessing a divergence from the trend with gold prices actually down 5% for the year.Historically, equity returns have outperformed the returns from gold. Annualised return of Sensex over 20 years has been 12.5% whereas the returns from Gold have been in the range of 10 percent. Although, Gold has underperformed equity returns historically it is advisable to have exposure to gold and other assets only to create a diversified portfolio. Typically, gold exposure in an individual portfolio should be around 5-10%. In the short term and medium term we do not expect gold to rally. Therefore in our opinion the exposure to gold should be only for diversification purposes this year. Indian equity markets are also expected to underperform this year given the phenomenal returns over last year. Therefore we do not expect double-digit returns from the equity markets either. In this context investment strategy for this year should be focused on capital preservation, large cap names in the Equity markets with good dividend yields should be considered as an investment option.