Gold's weakness in the international market is primarily on account of the US Federal Reserve's hawkish stance. The US Fed believes that the economy is strong enough to support further increases in interest rates. It has hinted at four rate hikes this year and more next year. The US Fed is also shrinking its balance sheet. “The US Fed is raising rates while other major central banks are not. This has led to a stronger dollar, and that is hurting gold,” says Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management.
Revival on the anvil?
Under normal circumstances, gold
would have benefitted from the ongoing trade tensions between the US and China, but it has been completely overwhelmed by the dollar's strength. Moreover, risky assets such as equities continue to do well in the US.
The threat of trade wars has only impacted currencies as of now. Analysts are expecting gold
prices to start rising with a lag. They say that gold
could revive if the ongoing trade dispute between the US and China flares up into a full-fledged trade war.
Moreover, tightening by the US Federal Reserve (US Fed) has reduced the spread between the US two- and 10-year bond yields. If there are a couple more rate hikes in the US, that could lead to an inverted yield curve, giving rise to the threat of recession. This could give a boost to gold.
All eyes are also on China, which is sitting on $1.2 trillion worth of US treasury bonds. If China decides to dump some of them into the market as retaliatory tactics, it could cause yields to harden. If the US economy suffers, gold
would benefit from this.
Negatives priced in:
Experts say that at the current price levels the negatives seem to be more than factored into the price of gold.
Given the risks that exist today in the global economy, gold
can prove to be a useful portfolio diversification tool and can help reduce overall portfolio risk. “Equities have been running up while gold
has not been doing well for the past several years, so investors’ portfolios may have become underweight on gold.
They should use the current price levels to build their allocation to the yellow metal,” says Mehta.
Should you have meaningful exposure to gold?
Based on how things are panning out, investors should take significant exposure (up to 15 per cent or more of their portfolio, depending on their comfort) to gold
right now with at least a two-year horizon, according to Narne of Motilal Oswal. Global inflation, rising interest rates, tightening of monetary policies by central banks, high crude prices are all positives for gold.
“Globally, if things worsen from here, gold
can surpass its all-time high in India. Investors need to keep a long-term horizon as the price of gold
will rise with a lagged effect. We can even see over 30 per cent increase from the current prices,” says Narne. The most prominent cue for investors would be falling equity markets.
The global markets
are interconnected. Trade wars can impact growth and will then impact the stock market.
One way you may hold gold
for the long term is via sovereign gold
bonds. They pay an interest of 2.5 per cent annually on the initial purchase price but suffer from lack of liquidity. The government will buy these bonds back from investors only after five years and they trade at a discount in the secondary market. Gold
mutual funds offer liquidity, but you will have to pay an annual expense ratio (0.4-1.2 per cent). Avoid the gold
deposit schemes run by jewellers. “Investing in these schemes becomes a bet on the jeweller's financial position.
You could lose your entire money if he goes bankrupt,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA).