Gold Is a True Crisis Hedge, a Haven Now

Apr 14, 2020

If you recall, last month my colleague and the Editor of Daily Wealth Letter, Mr Rounaq Neroy wrote to you about 'How the Pandemic of Coronavirus Is Helping Gold Investors.'

Today I would like to reiterate why investing in gold during crisis like this is a wise investment decision.

When my colleague wrote to you, the novel Coronavirus was an epidemic declared but there weren't many cases of Indian origin reported. But after March 11, 2020 it was declared a pandemic because it could not be contained. Slowly it spread its wings over Indian soil to take the overall count to 10,000 plus cases.

[Read: Coronavirus Has No Antidote. Your Bad Investments Could Have.]

The only way to control a pandemic is by imposing lockdowns and curfews as strategic measures to prevent the contagion spread across the world.

Over the last couple of months, the aftereffects of this pandemic on the global trade, global economy, and global growth prospects have been devastating; the equity markets have caught the flu and are currently panting for a positive breather.  The wealth of investors has been eroded in equities so far due to extreme volatility.

But Warren Buffet, called Coronavirus "scary stuff"... has offered a piece of advice while speaking to the media: "I don't think it should affect what you do in stocks", he said.

[Read: 5 Valuable Money Management Lessons from the Coronavirus Pandemic]

Image source: Image by PublicDomainPictures from Pixabay 

However, in view of the on-going swindling, there's extreme turbulence in the equities; investors are despondent about losing their wealth. In a lockdown scenario brought down due to pandemic, investing in gold for its ability to act as an effective hedge against any downside is the right thing to do.

Gold is one of the oldest and most essential assets that is treated differently...

  • It has proven itself to be symbolic of wealth that carries immense value

  • Highly liquid asset

  • Can deliver better long-term, risk-adjusted returns

  • An effective diversifier than other commodities

  • Outperforms in low inflation periods

  • Gold has lower volatility

  • Gold does not degrade over time, unlike several traditional commodities

It helps deal with systemic risk, during stressful times. Gold as an asset has a negative correlation with other assets during risk-off periods, protecting the investors' capital against tail risks, and other events that have an adverse impact on capital or wealth. This safety of cap is not present in other commodities or assets also.

And currently, gold has gained momentum and is showing an uptrend.

Graph 1: Gold gaining momentum

Data as on March 31, 2020
(Source: Personalfn research)

The long uptrend shows that the precious yellow metal is shining brighter ever than before and would continue to do so. The upheaval caused due to coronavirus has proved to be supportive of its growth, but there are other factors too that have gold's price soaring...

  • Depreciation of rupee against the dollar,

  • The continued weakening of economic growth globally,

  • Slow growth heading into a phase of stagflation with CPI inflation inching up and India's GDP growth rate deteriorating,

  • Increasing unemployment levels,

  • Bond rates continue to hit all-time lows, which are inversely proportional to gold as well,

  • Federal Reserve made a 50-bps rate cut, even central banks of other countries have gone ahead with rate cuts including RBI implemented 75 bps to ease concerns,

  • Increased stock market volatility,

  • And the financial uncertainty.

Besides, the central banks around the world have recognised the importance of gold and increased their holdings as a measure of managing economic reserves.

Graph 2: Holdings of Central Banks of Top-10 countries

Data as on April 2, 2020
(Source: World gold council)

Even WGC has stressed gold's significance in its report of 'The relevance of gold as a strategic asset'...

"Gold benefits from diverse sources of demand: as an investment, a reserve asset, an adornment and a technology component. It is highly liquid, no one's liability, carries no credit risk, and is scarce, historically preserving its value over time.

Gold can enhance a portfolio in four keyways:

  • Generate long-term returns

  • Act as an effective diversifier and mitigate losses in times of market stress 

  • Provide liquidity with no credit risk

  • Improve overall portfolio performance"

Hence, in my view, in the current situation consider allocating some portion of your investment portfolio to gold and its equivalents. Allocate at least 10-15% of your entire investment portfolio to gold and hold it with a long-term investment horizon.

In the current environment of lockdown, the retail segment is hit as gold imports have reduced, almost stopped and the price is high. Current peak season of wedding is adversely affected due to the lockdown, for the jewellery and physical gold demand is hit. So be a smart investor investing in gold savings funds, gold ETFs or sovereign bonds is a sensible strategy.

Globally, gold ETF inflows have surged and in terms of AUM as well it has increased. Details of some of the top eighteen countries can be seen below.

Table: Surge in ETFs inflows of top 18 countries

YTD Data as on April 3, 2020
(Source: World gold council)

In India, as well, as per recent AMFI data the number of folios and the Average Asset under management of the Gold ETF investment is increasing and is going strong, as see below.

Graph 3: Gold ETF investment is increasing

Data as on March 2020
(Source: AMFI, PersonalFN Research)

Another important thing is when you invest in gold in paper form, it is more effective. Holding gold in the non-physical form will provide relief to you in terms of the security aspects which is typically associated with holding physical gold. Another big advantage is that you do not have to worry about the quality of the gold.

Transacting in Gold ETFs is at the prevailing market rate, while for a gold fund, it is at the NAV. Thus, there is no question of you shelling out more to fill the pockets of anyone who is selling gold - be it a gold merchant or banks.

So avoid a speculative approach while investing in gold and invest strategically in Gold savings Funds and Gold ETFs.


Warm Regards,
Aditi Murkute
Senior Writer


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  • Can you ask Ms Divya Grover to stop using pejorative & racist terms like the "Hindu rate of growth". There are better ways of expression. Thanks | Apr 15, 2020