Gold sizzles as world economy fizzles: Will 2020 be the year of yellow metal?

April 26, 2020

New York (Apr 26)  Gold was the ‘Student of the year’ for 2019 with a spectacular performance vis-a-vis financial asset classes. This came as a huge respite for gold lovers, especially Indians who have a a natural tendency to own gold – at times way beyond what may be needed. Hence the joy may be outflowing to gold investors as the winning streak continues well into 2020. In 2020, year to date, gold has returned ~21% annualised return!

So, what justifies this gold rush?

For starters, gold is an asset which has to be mined, and there is no other way to produce gold. This is unlike the currencies which can be printed to infuse liquidity into the financial markets. Here, gold assumes the role of the ‘last person standing’ as faith in fiat currencies falter.

The deadly coronavirus outbreak has led to a sharp decline in the world economic outlook. There are reports that suggest the worst-ever global outlook since the great depression of the 1930s. Even if that is exaggerated, the fact remains that over 40 central bankers have rushed to ease the monetary conditions to combat the medical crises the world is facing. Thus it is no surprise to see the solid innings gold continues to play in the current year as well.

India and China are among the largest gold consuming nations in the world. It is interesting to note that even central banks like Turkey, Russia, Mongolia etc. have been adding gold to their reserves.

So can the winning streak continue?

After a spectacular run in any asset class, it is natural to see some small breather, which holds true for gold too. However, given the uncertain medical situation we are in and the extended phase of global slowdown, gold is unlikely to stop its northward march so soon! Therefore, the “Bhag Milkha Bhag’ act may well be a trend for gold till some clarity emerges.

Investors, however, should be mindful of not chasing the momentum and get lop sided while investing in gold. Treat gold like an insurance cover on your portfolio. Have only so much as is required to offer a ‘cover’ to your financial assets. In some sense, it is akin to having a term insurance on your life. Hence, the predominant investments could still be tilted towards financial asset classes like equities and fixed income. I would say: Equities – the wealth creator; Fixed Income – the wealth stabiliser and Gold – the wealth protector.

Occasions are a great time to own gold traditionally in most Indian households. While I do not urge you to break away from this tradition, one can be more mindful of the way one can own it.

Gold ETFs, gold fund of funds, sovereign gold bonds are better alternatives to physical gold, and the hassle of storage etc is outsourced too. These are all backed by physical gold and hence this is a more hassle-free way of owning gold. As lifestyle undergoes a 360 degree change in the wake of Covid-19, I would urge you to make changes to your buying pattern and choose a more appropriate vehicle to own the yellow metal.

Wish you all a Happy Akshay Tritiya. Stay safe and take care. Make sure to stay healthy and also keep your portfolio well hydrated ?


Silver Phoenix Twitter                 Silver Phoenix on Facebook