Central banks’ actions, too, are expected to support gold.
In September, the US Federal Reserve cut rates for the second time since 2008 (the first cut was in July). “A rate-cut cycle in the US, which is unlikely to reverse anytime soon, has the potential to spark off a secular bull run in gold,” says Ajay Kedia, director, Kedia Commodity.
If the global economic slowdown continues, central banks are likely to respond by loosening monetary policy. They would cut interest rates and undertake unconventional measures, such as quantitative easing. Many nations, including the US, could move to negative interest rates. “Several countries could undertake deeper rate cuts this time to devalue their currency and export their way out of a slowdown,” says Mehta. In a scenario where real interest rates are negative, investors will turn to gold
due to its status as a store of value.
Globally, smart money is moving to gold. “Holdings of Gold SPDR, the world’s largest gold exchange-traded fund, have risen, and central banks of Russia, Turkey, China, and India have also been purchasing yellow metal for the past two-three years,” says Kedia. Any spike in geopolitical tensions, such as between Saudi Arabia and Iran, India and Pakistan, or the US and North Korea, would also drive investors to this safe-haven asset.
A few factors have the potential to mar gold’s prospects. The trade wars could get resolved amicably, though the possibility of that happening is remote. The dollar has been strong, largely because other currencies have been weaker. If the greenback continues to strengthen, that would dent the yellow metal’s appeal. Again, experts don’t expect this to be a long-term phenomenon.
The final factor that could restrain appreciation in the price of gold is an influx of recycled gold. “India and China have vast reserves of gold. When prices move up within a short period, consumers tend to exchange old gold for new. This reduces the demand for fresh gold,” says Kedia.
Have a 10-15 per cent allocation to gold at all times. With the global economy in the doldrums, you may increase your allocation to the yellow metal to 20 per cent. If you do so, you must have a horizon of at least three-five years for that extra 5 percentage points of tactical allocation.
Finally, do not be concerned that gold may not rise further after its 20 per cent surge. “Gold has done well for one year after remaining stagnant for five years prior to that. The upward leg in gold’s cycle tends to last for at least three-four years,” says Kedia.