New Delhi, Mar 09: Domestic gold prices have come down to nearly Rs 44,000 per 10-gram levels from its all-time high of Rs 55,901. With this correction in gold prices, jewellery demand has picked up. Jewellers are buying gold to meet upcoming weddings and Akshaya Tritiya demand. But investment demand is yet to pick up.
Should you use the recent correction in gold for investment?To get the answer to the above question, you need to understand the factors that were driving prices of the yellow metal during 2019 and 2020 and the reason behind the recent correction. As gold is a safe haven asset, demand for gold rises when there is any uncertainty in the economy, the one that we witnessed in the earlier part of 2020 when the Covid-19 pandemic broke out. However, the global economic outlook is changing now.
With economic activity gradually picking up pace and countries ramping up vaccination, the uncertainty around the economic growth is petering out. So the demand for gold as a risk aversion asset has come down. Analysts say the chance of gold crossing the previous peak once again is remote.
Other than economic uncertainty, gold prices are also impacted by actions of central banks and the policies adopted by them. When the pandemic broke out, central banks around the world followed an easy monetary policy and ensured that sufficient liquidity is available in the economy for lending purpose.
This additional liquidity started chasing safe assets like gold and government bonds due to which bond and gold prices rose and yields fell. But now as economic activity is gradually picking up, investors are now more risk-averse and are investing more in risky assets like equities and low-quality corporate bonds expecting higher returns.
So money is now moving out of gold and government bonds to equities and risky corporate bonds.“The recent selling pressure in gold can be attributed to the investors getting into the risk on mode now,” ET Wealth quoted Lakshmi Iyer, CIO – Fixed Income and Head – Products, Kotak Mutual Fund as saying.
The third reason behind the earlier gold rally was weakening of the US dollar. As international gold is traded in US dollar, weakening of the same was one of the technical reason behind the massive gold price rally in 2019 and 2020. But now the reversing is happening; dollar is bouncing back from the five-year low of 89 and moving higher.
Factors that may work in favour of gold
The US government last week approved a massive stimulus package worth $1.9 trillion, which may result in higher inflation and commodity prices may rise. Analysts say this may trigger a technical rally in gold. But experts believe the gold rally is over and technical bounceback if any may not sustain for long. “We can consider the gold rally is almost over because it has already broken key technical support of $1,760.
Though a few positive factors like the stimulus package by US, etc can result in short term rallies, that won’t be sufficient to take gold prices back to its previous peak,” ET Wealth quoted Harish V, Head of Commodities Research, Geojit Financial Services as saying.Experts say the impact of gold price fall in the international market will be less in India due to the weakening of rupee against the dollar. Experts say gold is expected to take support near Rs 43,000 levels.
What should investors do?
As the gold rally is over for the time being, investors should not buy gold to generate additional returns. But as gold is used as a hedge against inflation, investors should have at least 10-15% of their portfolio parked in the yellow metal. “Since the utility of gold like providing inflation hedging and moderating the risk of a portfolio, etc are still there, long-term investors need not worry about short-term fluctuations and can maintain allocation of around 10% to gold. Indians are known for using corrections to buy gold and the same can be done by people who don’t have gold exposure now,” said lyer. (Times Now)