Gold rally to continue for some time, book some profit now: Experts

Massive purchases by central banks have been another driver of demand for the yellow metal

Sanjay Kumar Singh, Business Standard
15th January

Investors in gold had a remarkable 2019. With returns of 23.8 per cent, the yellow metal was way ahead of any other asset class. And with global headwinds like heightened tension between the US and Iran grabbing headlines every day, gold has been the preferred haven for many.

On January 6, prices vaulted over the Rs 42,000 per 10-gram barrier in the domestic market. Two days later it beat the $1,600 an ounce mark in the international market. Christopher Wood, global head of equity strategy at Hong Kong-based global investment bank Jefferies, fuelled further interest in the yellow metal further with his forecast that it would touch $4,200 an ounce in the long run (though he refrained from specifying a time frame).

The yellow metal is up about 4.9 per cent over the past month. “Geopolitical tensions are quite unpredictable. But we know there are several geopolitical hotspots around the globe today, and anyone of them could flare up periodically, affecting global financial markets and the economy adversely. An allocation to gold becomes imperative because it acts as a hedge against such risks,” says Chirag Mehta, senior fund manager-alternative investments, Quantum Mutual Fund.

The environment that led to the large price spurt in 2019 remains unchanged, so the rally may continue this year too. The global economic slowdown is not going to end anytime soon. Any US-China trade deal is more likely to be a temporary truce.

The US Federal Reserve (Fed) had been hiking rates but was compelled by slowing growth to change course and undertake three rate cuts in 2019. “All the major central banks have now adopted an easy monetary policy. Besides the Fed, the European Central Bank is in rate-cutting mode. Interest rates in Japan and Germany are in negative territory, while rate cuts appear imminent from the Bank of England as well,” says Kishore Narne, head of commodities and currency, Motilal Oswal Financial Services. When real interest rates plummet, gold gains.

Massive purchases by central banks have been another driver of demand for the yellow metal. “With the world’s two largest economies feuding, central banks are diversifying their reserves away from fiat currency and into gold,” says Narne. Within India, the rupee has depreciated and may continue to do so due to weakening economic fundamentals.

A few inhibiting factors could, however, come into play that may temper the pace of price rise in future. The first is the recycling of old gold. “Indian households hold 20,000 tonnes of gold. Whenever gold’s price escalates sharply, recycled gold starts finding its way into the market,” says Ajay Kedia, director, Kedia Commodities. When the price of gold had fallen to around $1,050 per ounce, several mines had closed down. “With gold’s price crossing the $1,500 threshold, many mines could be reopened, and supply could increase,” adds Kedia.

Silver is much cheaper than gold today when compared to historical averages. A shift by investors to silver, too, could prevent a steep upside in gold.

In the current environment of a slowing global economy and geopolitical tensions, investors must maintain a 10-15 per cent allocation to gold. Someone who has become overweight on gold may book partial profit and bring his allocation back to the original level. Exiting gold entirely would, however, be a mistake. According to Kedia, most gold rallies of the past have spanned at least three-four years. The current one is only one-and-a-half years old.

New investors should enter whenever gold’s price corrects, or they should build allocation systematically.

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