Diversify your portfolio, park some money in gold now

Religare Commodities Research Desk

Gold prices have continued to face the brunt of the resurgent dollar lately that has rallied furiously to test the psychological 100 mark, its highest level in last 13 years. The main factor behind this however, remains the wide spread expectations of an interest rate hike by the US Federal Reserve sometime soon on the back of robust job creation and a strong economic recovery. Before we drill down into this, let us have a quick recap first. 

In 2008, when the world economies collapsed, the US Federal Reserve came up with an unprecedented method to support their economy, by buying US treasury bonds in order to boost liquidity into the system. This typically led to a regime of low interest rates, a setup which was so positive for gold that it witnessed a splendid bull run , spiraling towards a new all-time high above $ 1900/ounce in the year 2011, from the levels of sub $1000/ ounce in 2008. Primarily, this was on account of the easy money, that chased the safe haven asset in an environment where there were big question marks on the future growth prospects, absence of attractive interest rates and the depleting real value of currency due to excessive printing.

Things however changed their course and the cycles have reversed overtime. The Fed not only halted its bond buying programme in the previous year, but has also signaled an inclination to start increasing the interest rates. As investment in gold fetches no interest income, the fact has been viewed as a big mood spoiler for gold bulls and as a result prices have eroded a significant portion of their value over the last two years. Having said, in the wake of the fact that the dollar has already rallied in a vertical manner, there is high probability that the worst in gold prices has already been factored in and when the interest rates hike actually comes in, there should be a minimal negative impact. Also, the mammoth bond buying programme of 1 trillion Euros, by the ECB to revive the European economies is a big positive for the precious metal that can offer support for the prices. Not to forget the episode of Greece which resurfaced in the start of this year, when gold prices marked significant gains in January this year. It is just one example of how turmoil in economies tends to entice investors towards gold. The ongoing correction in gold is a very good opportunity for the long term investors to start buying in this asset class that has not only stood the test of time generating huge positive returns, but also offered a hedge against inflation. In the current scenario ,where the equities have seen a sharp run up ,it especially makes sense to park some funds in gold, in order to diversify individual’s portfolio and benefit from a natural hedge against any major downfall in equities!