With central banks turning dovish, equity markets are rejoicing as rate hikes are now off the table. At present, money is flowing into risky assets rather than into gold.
“But for how long can liquidity keep driving the markets in the absence of earnings growth? At some point, equities will start correcting as earnings growth slows down, while gold
could get revalued,” says Mehta.
From an Indian investor’s perspective, the rupee has appreciated significantly against the dollar in the past quarter or so. It has pulled back from the 73-plus level to the 69-plus level currently. The rupee's strength has got accentuated by the dollar swap carried out by the Reserve Bank of India recently. “The rupee looks a little overvalued at present. As and when it corrects and returns closer to its fundamental value, Indian gold investors will benefit,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
Crude oil is currently trading at $70 plus per barrel. When crude is trading at a higher level, that is usually bad news for the rupee. If it stays at an elevated level, the rupee could correct, and that would be positive for the rupee price of gold.
Finally, gold has delivered poor returns for a substantial period of time (see table). There is little interest in investing in gold at present. “A good contra-indicator for investing in an asset class is when interest in it is weak because past returns are looking poor,” says Dhawan.
Strong dollar is an impediment
The current strength of the US dollar is acting as a deterrent, preventing gold from rising. At present, the European Central Bank (ECB) is even more dovish than the US Fed. The latter has already carried out quantitative tightening and undertaken a few rate hikes. But the ECB has only ended quantitative easing. While it had spoken of rate hikes earlier, lately it said that it will not undertake them, given the weak economic climate of the euro zone and the political uncertainty in some European countries. The euro’s weakness is lending strength to the dollar, a factor that is negative for gold.
The possibility of a US-China trade deal is another obstacle. If the tariffs imposed last year are removed, that could act as a positive trigger for the equity markets and prove a setback for gold.
Indian investors are not investing more in the yellow metal because many of them already hold a lot of it. Moreover, it has not performed well for more than five years. As a result, they are reluctant to purchase more of this asset.
Buy when prices fall
The uncertain global macro environment could make capital flows into India, and hence the equity markets, more volatile. In such circumstances, gold should be present in your portfolio to act as a diversifier.
Use intermittent corrections to buy gold. “An allocation of 10-15 per cent is the optimal level for most portfolios. At this level, returns are not affected negatively - in fact, such an allocation may add slightly to portfolio returns - while risk reduction is maximum,” says Mehta.
Other experts hold a slightly different view on how much exposure you should have to gold. “It can vary from 0-10 per cent, depending on how aggressive or conservative you are. Aggressive investors can have zero exposure to the yellow metal. Instead, they can invest in international equity funds to benefit from the long-term depreciation of the rupee against the dollar. Conservative investors can have an exposure of up to 10 per cent, while those in the middle can have a 5 per cent exposure,” says Dhawan.
As for which instruments to use for taking exposure to gold, sovereign gold bonds (SGBs) should be your first preference as they offer an interest rate of 2.50 per cent per annum. However, these bonds are not liquid and are suited for investors who have a horizon of at least five years. Investors with a shorter horizon may opt for gold exchange traded funds (ETFs), as they are more liquid. However, they do not pay any interest and instead charge an expense ratio of around 1 per cent annually. Investors also need a demat account to invest in them.