Gold
has always been a key investment
option for many across the world. However, when do investors look at gold and
why? The yellow metal has often been seen as the go-to option whenever there’s
been recessionary tendencies. In the wake of the covid-19 pandemic too, gold prices have seen an uptick, as the
world is witnessing an economic
downturn. In an unprecedented time such as this, gold prices have shot up in India.
Historically
too, gold picks up whenever there’s a downturn. Take the financial crisis of
2008, for instance. Gold outperformed most other asset classes and fetched
returns of 6 per cent when equities fell by a whopping 60 per cent during that
time in India. Gold prices
and the stock market tend to have an inverse relationship with each other.
Whenever the stock markets take a downturn or collapse, gold rises in demand,
and more investors look for it.
More
recently, even during the US-China trade war that began in 2018, gold prices
again saw an uptick in 2019. The uncertainty in trade negotiations and the US
presidential campaign were seen as some of the reasons.
According
to the World Gold Council’s (WGC) report released in mid-May (1),
gold has gone up by more than 12 per cent in the world market thus far in 2020.
Countries across the world, including India, announced economic stimulus
packages, and gold has seen to benefit from such steps, the report noted. The
WGC report also forecast that if there’s an emerging markets slump, gold’s
results this year and next will be higher, and will stay in the positive range
even two years from now. However, if the world slips into a much greater
recession, this year’s good performance may be followed by a dip in 2023 and
turning negative in 2024. Depending on the recovery speed and how the global
scenario unfolds the five-year return on gold investments could vary greatly.
How has gold performed in
recent times?
In
India, gold has always been seen as a hedge investment. Investors are known to hold on to gold as it is seen
as an investment mechanism that offers protection from inflation. When the
currency value drops during an inflationary period, investors hold tightly to
gold. Gold prices
also provide the much-needed cushion for investors whenever there is an
increased volatility in the market. In
addition, when the value of the rupee depreciates against the US dollar, Indian
investors stand to gain in overall returns in gold investments.
In
2019, India saw gold
prices jumping nearly 25 per cent on the MCX, the Multi-Commodity
Exchange of India. In mid May of 2020, gold touched a high of a little over Rs
47,900 for 10 grams on the MCX, and at that point gold price had seen a 16 per
cent rally thus far in 2020. This happened on the back of the covid-19-related
uncertainty, and fears over the US-China tensions. However, more recently, on
June 5, gold prices
saw a drop. On the MCX, gold futures shed over 2 per cent or nearly Rs 1,000 or
10 gram in one day. The reason was that economies globally have been reopening
and unemployment rates in the US have been falling. In May, US unemployment
dipped a little to 13.3 percent as 2.5 million jobs were added.
(Source:
economictimes.com*)
What should an investor look for?
The
growth forecasts for the Indian economy have been around 3% for FY2020 and
about 6.5% for FY21. However, these numbers are subject to revision. If you are
an investor, you may be looking closely at the developments. Since gold is
always seen as being in an inverse equation with equities, you may also be
watching your gold investment
carefully.
In
terms of average returns, gold has delivered 14.10 per cent every year, for the
past 47 years, according to the WGC’s India report in March 20202.
Meanwhile, the rupee has seen depreciation this year, which can turn out to be
good for gold prices.
If
you are an individual investor, you have many options to invest in gold. You
could opt for gold ETFs (exchange traded funds) or GSBs (gold sovereign bonds).
There is also physical and digital gold buying as options. However, it helps to
remember that any investment
should be seen as a long-term goal, and gold would be part of your portfolio as
a hedge option and
to offer stability from volatile markets.
In a nutshell
Gold has traditionally been seen as a good investment option to have in your portfolio, as it provides that much-needed stability in a volatile market. It has historically been observed that gold shines every time there has been an economic downturn, from the global financial crisis of 2008 to the recent times when there has been a trade war between the US and China, to today, when there’s a covid-19 pandemic-related economic downturn. If you are an individual investor, it’s time to explore Tata Capital for a range of wealth management and investment opportunities, apart from advisories and expert guidance to grow your wealth.
28 August 2020
5 mins read
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