COMMENT – Don’t ditch your gold investments yet

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Gold has had a sizzling run since last year, rising by over 25% through 2019 and then adding another 17% since the start of the year till date. 

As the Covid-19 pandemic has prompted a widespread reassessment of global economic prospects, investors have rotated into safe-haven assets, including gold, the World Gold Council said in a recent report, adding that gold has been one of the best performing safe-haven assets this year.

Between 1 January and 20 April 2020, gold outperformed US treasury bonds and bills, USD-denominated investment grade US agency and corporate debt, and Eurozone sovereign bonds, it said.

But with countries world over beginning to ease lockdown, the investment sentiment appears to be again shifting towards equities. So is it time now to ditch the yellow metal from your portfolio ?

Probably not. While the rally in gold appears to have paused for the moment, there are plenty of factors to push it higher, albeit at a slower pace likely through the rest of the year.

For one, central banks are unlikely to stop their rate cuts in the near future as nations aim to bring back economic growth. Traditionally, lower rates tend to support gold, especially if the US Fed does so as it weakens the value of dollar – a currency with which gold historically has an inverse relationship.

With the US elections looming in October, President Donald Trump seems to be losing his popularity and Democratic Party’s Joe Biden appears to be gaining ground, a prospect that is likely to create tremendous uncertainty as earlier a Trump win was seen as a given.

Irrespective of who is elected, the closely fought race for the world’s No. 1 economy is bound to lift gold closer to the elections.

And let’s also not forget that during the past three decades, gold has outperformed risk assets in nearly every single major market downturn. That outperformance has continued during the Covid-19 pandemic, reinforcing gold’s role as a counter-cyclical asset during periods of market stress.

While stock market punters have been agog over reopening of economies that has supported a broad-based rally recently, chances are also that the buoyant sentiment may ease as and when corporate results are declared in coming weeks and the impact of the Covid pandemic becomes clear.

There is yet another reason related to the pandemic that could further fuel gold’s rise. Globally mining activity have either halted or are moving at a crawl due to a shortage of workers, leaving less of the commodity available for trading. It would mean more dollars chasing an ounce of gold than before.

Gold traders expect the price of the yellow metal to remain barely changed at  around Rs 45,000/10 gram in India and around $1,650/ounce internationally, but coming months could see the yellow metal rise to Rs 48,000-Rs 50,000 and $1,700-$1,750.

Biman Mukherji is a columnist and consulting editor at Indoasiancommodities.com. He has worked for international news organisations such as Reuters, The Wall Street Journal as well as for newspapers like The Times of India. He can be reached at biman.mukherji@indoasiancommodities.in

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