Any re-pricing of economic and political risks would leave investors scrambling for gold
Gold has stunned Indian investors in 2019, with a solid price performance of over 20%. Rarely does gold beat stocks over a 12-month long period, especially when equities are doing well. Stock markets are up over 16%, debt markets provided 7-8% usual return, but the dark horse has been gold this year. Long held in investment portfolios as a substitute for fiat currencies, gold as a trusted asset has earned its place in smart investors’ holdings due to its ability to weather financial storms. To its credit, gold has not only managed to defend when other assets go down; it also has moved up well even when other competing assets are doing okay. As we enter 2020 with new hope, here are five reasons why gold should be in your portfolio in 2020. Read on.
Gold prices rise on the back of falling interest rates. Gold and interest rates traditionally have a negative correlation. The gold price goes up when interest rates go down, and the prices goes down when rates go up. It is argued that rising interest rates make stocks, government bonds and other investments more attractive to investors, while gold becomes less attractive (hence price drops). Many experts say RBI may cut repo rate by 60-70 bps in 2020.
Additional Read: Investing in Sovereign Gold Bonds? Here is what you need to know
It does not take an expert to project that the world is passing through grave economic challenges. The global economy is in a synchronised slowdown. The IMF has downgraded growth for 2019 to 3%, its slowest pace since the global financial crisis. The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods. During some type of global economic uncertainty, investors will often buy gold as a safe haven.
When Indian stocks fall, investors buy gold. But, why do Indian stocks fall? There can be a variety of reasons for equities to decline, but the most relevant reason for 2020 is over-valuation. Nifty 50’s current trailing twelve month PE is at over 26 times, nearly 50% premium to its 18-year average. Thus, based on the current PE multiples, markets appear expensive. The equity markets are rising because investors are pricing in a strong economic recovery in 2020. If that recovery does not happen in the way markets expect, there will be some painful adjustments. When stocks fall, gold can corner some inflows, thus leading to price gains.
Additional Read: Which is the best asset class among equity, debt, gold, REITs, real estate? Depends on your holding time
If you look at gold price movement over the last 12 months, it does show over 20% return. But, in the last 3 months, gold prices have been flat. In fact, in many locations, gold prices have corrected a bit. A pause in gold price movement allows you to build small positions. Buying low, and selling high works in all assets. In a modern investment portfolio, gold has its place and the best time to buy is when prices are quiet.
If gold prices rise after a quiet year, the price movement usually sustains for 12-24 months. Since 1980, there have been eight instances when gold prices have gone up after a quiet year (when gold prices have given single-digit returns or losses). Out of the eight instances, at least five times gold not only performed for one year but continued to perform for another 12 months. Gold prices gave 5% gain in 2018. In 2019, the yellow metal has already gained by over 20%. So, 2020 could be a reasonable year as well.
Gold, which comes with its phases of consolidation and growth, acts as a good hedge and can help in protecting your portfolio from risks such as inflation.
One should aim to have an allocation of between 10%to 15% of a portfolio in gold-linked assets. Gold exposure via mutual fund route should ideally be through multi-asset mutual funds like ICICI Pru Multi Asset, Essel 3-in-1, Axis Triple Advantage etc. You may also use gold sovereign bonds, but there is a mandatory investment tenure.
Always remember you are not just taking a call on gold as an asset class. Gold is a part of a multi-asset portfolio. Asset allocation is responsible for 90% gains of a portfolio. So, keep allocating to gold and other assets in a systematic manner with discipline.
Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument belonging to life insurance companies mentioned in this article.
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