With the promise of a Covid-19 vaccine renewing hopes of return to normalcy, gold has started to lose its shine. On November 9, just ahead of Pfizer and BioNTech’s announcement on their vaccine, the price of 24-carat gold in Delhi was Rs 52,183 per 10 grams. Over subsequent weeks, as Pfizer-BioNTech and three more vaccine developers announced results of phase 3 trials, it led to a sharp decline in the price of gold, which by Wednesday had fallen by 7.7% to close at Rs 48,169 per 10 grams.
In the global market, the price of gold has dropped by 5.7% since the first announcement on vaccine trials, and was $1840 an ounce on Thursday.
In the meantime, news on the vaccine candidates brought cheer to equity investors as the benchmark Sensex has risen 6.5% since November 9. The broader markets witnessed a stronger rally, and the mid- and small-cap indices at BSE, which had been underperforming, rose 14.4% and 12.5% respectively in the three week period.
This short-term trend over the last three weeks only emphasises the role of asset allocation in one’s investment portfolio. Despite all the volatility and adverse news flows over the last eight months, all investors who follow this principle of investment would be smiling now.
If a sharp jump in gold prices (after the outbreak and global spread of Covid-19) had provided a cushion to the portfolio between March and June, equity investment in the portfolio would be doing that now. The debt component of the portfolio would not only have preserved the value of a significant portion of your capital when the equity markets were choppy, but would also have provided the investor with the desired liquidity in times when income/ cash flows were impacted.
Where are gold prices headed?
Gold prices have retracted by over 15% from levels of over Rs 57,000 per 10 grams in August to around Rs 48,000 now. They are expected to remain weak in the near term, as there is a sense in the market that the risk and uncertainty surrounding the coronavirus has ebbed following the vaccine breakthroughs and amid the growing certainty that Joe Biden will take over the White House.
So, while several countries face a fresh spike in Covid cases, the fact that not one but four vaccines are in line, and that countries such as the UK and Russia have already given the go-ahead to mass vaccination, is overshadowing those concerns for now. While this may be the near-term trend, things may change quickly.
Should those who invested in gold at levels above Rs 50,000/10 gm worry now?
While traders who entered to make quick gains may have reason to be worried, investors who see gold as a generational asset should not be too concerned. Over the last two decades, gold has risen by over 10 times, and the long-term steep rise has had its crests and troughs along the way. One must also remember that the supply of gold is limited, and since there is demand from both individuals and central banks of various countries, the price of gold in the long term is more likely to have an upward trajectory.
Historically, a rise in uncertainty and fear is the single biggest factor that leads to a spike in prices of gold as central banks increase the pace of gold purchase. If uncertainty around the pandemic propelled prices beyond Rs 57,000 per 10 grams in August (from around Rs 40,000 in January 2020), it should be remembered that it is not yet over, and is certainly not the last risk the world will see. Gold prices get impacted by several factors including geopolitical tensions, interest rate movements and change in value of the dollar with respect to other currencies.
Chirag Mehta, Senior Fund Manager-Alternative Investments at Quantum Mutual Fund, pointed out several risks that persist. If widespread access to a vaccine is months away, return to normalcy is still longer away and prone to setbacks as the pandemic-induced economic damage has been severe for businesses and individuals. He also pointed towards mounting government debts and real interest rates going deeper into the red amid rising inflation.
“As evident, global policymakers are continuing to resort to the usual prescription of monetary inflation, credit expansion and government spending to tackle the economic fallout of the pandemic… The result will be currency debasement and years of low interest rates in order to service the debt. Gold, which has potential to store value over long time periods and does well in times of low nominal and negative real interest rates, will thus continue to be a strategic element of investment portfolios, generating risk-adjusted returns for the investor,” Mehta said.
Besides, trade tension between US and China, and the border standoff between India and China, will only add to the uncertainties. 📣 Follow Express Explained on Telegram
Should you continue with your investments in gold?
One should simply follow one’s asset allocation and continue accumulating gold in a disciplined manner. Lower prices at the time of accumulation would mean better returns for the investor when prices rise. Also, since the interest rates are set to remain low for now, higher inflation levels would mean negative real interest rates for investors. In such a situation, gold will be a better investment as it does provide a hedge against inflation.
While the allocation in gold could be anywhere between 5-10% of your investment portfolio, you should invest in gold via sovereign gold bonds. While it offers capital gains in line with gold price movement, it also offers a fixed 2.% coupon per year.
Another option is gold exchange traded funds (ETFs) floated by mutual funds that invest in gold. They have an expense ratio ranging between 0.5% and 0.8%.
Investment in the form of gold coins is expensive because of high making charges that vary between 8% and 15%.x
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