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Gold at Present Levels offers Excellent Buying Opportunity

Gold was one of the best performing assets of 2020 driven by a combination of

  • high risk
  • low interest rates
  • positive price momentum.

However, Year to Date (FY 21), it has dropped from US $ 1888 levels to US $ 1690. The percentage drop has been even more severe in INR terms as customs duty was lowered by 2.5% in the recent budget.

Gold price has been under pressure as the opportunity cost of holding Gold has gone up significantly as US treasury yields have recently climbed quite sharply to 1.5%.

Despite this recent climb in yields, our take for the remaining part of FY-21, is that Gold prices will be well supported in view of the factors outlined below:

  • Its performance will be driven by the strong economic recovery in China and India leading to higher consumption demand. India and China now constitute nearly 50% of the global consumption.
  • Though the yields have run up recently, we expect the central banks to ensure and prevent any disorderly increase in yields. Further, the low interest rate environment is expected to be prolonged in order to combat the slow down due to COVID.
  • In addition, there are significant risks of (a) inflation resulting from the expanding budget deficits, combined with low interest rate environment and growing money supply and (b) pullback of the overvalued stock markets. Gold has historically performed well, amid equity markets pull backs as well as high inflation.

What factors are driving the long-term price trend of Gold?

Over the last 50 years, Gold price has grown at 11% CAGR (US $ terms) and as such its performance matches any other asset class including equity.

Structural factors that have driven this growth are:

  • Accelerating economic growth in India and China leading to a sustained increase in demand for gold jewelry. This factor will continue to play its role for many more years.
  • Low interest rates and large quantum’s of negatively yielding bonds in much of the developed world implies lesser opportunity cost of holding Gold
  • Hedge Funds/ Pension Funds are increasing their allocation to gold as they realize the diversification it provides
  • Central Banks have continued to switch US $ assets to Gold all through the last decade. This trend may accelerate even more as US economy loses its dominance further.

Our Recommendation

We feel that this price correction (20% from the peak levels reached in Aug 2020 in INR terms) offers an excellent opportunity to build onto Gold exposure in your portfolio.

We feel that the price will be well supported in the near term, in view of the several supportive factors outlined earlier on.

We recommend 7.5% to 10% Gold in your portfolio.

The more aggressive investors can add another 5% as a tactical trading play on any further dip towards 1650 US $/ INR 43,000.

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