Will Gold Be a Worthwhile Buy This Dussehra?

Oct 12, 2021

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We are in the festive season, and Dussehra is around the corner. Besides performing Ramlila and burning the effigies of Ravana, buying gold on the day of Dussehra is a common practice and considered auspicious.

It is on this day, the leaves of Bauhinia Racemosa --a medicinal tree also called the Apta Tree--are exchanged among family, friends, and neighbours, as it is symbolic of good health, peace, prosperity, and gold.

The mythology behind this tradition is that a young man named, Kautsa in Ayodhya wanted to offer some Guru Dakshina to his teacher, sage Varatantu. Initially, the Guru was a bit hesitant. But due to persistent requests of his student to accept Guru Dakshina, he asked for 14 crore gold coins in an attempt to send away Kautsa.

This was a huge task for Kautsa and he was clueless about how he would raise such a huge amount quickly. Worried Kautasa went to Lord Rama for rescue who then advised him to visit the Bauhinia Racemosa tree or the Apta tree at the border of his village.

To help Kautsa, Lord Ram with the help of Lord Kuber-the Lord of Wealth-converted millions of Apta tree leaves into gold, on the day of Dussehra.

Kautsa was overwhelmed with this miracle and he took away as many gold coins as his teacher asked for in Guru Dakshina, leaving the rest untouched. Later the remaining coins were distributed amongst villagers.

Dusshera is also celebrated to commemorate the triumph of good over evil. The mythology behind this is that Lord Rama defeated Ravana, and Goddess Durga slaughtered buffalo demon Mahishasura on this day. Hence, the day of Dussehra is also known as Vijayadashmi.

For this reason, Dussehra is considered to be an auspicious day to start a new venture, buy a high-value asset, and even invest in gold --an eternal wealth. It is believed a new investment on this day will usher in good fortunes and welcome Goddess Lakshmi.

In the context of today's world, gold offers some notable benefits:

  • Unlike financial assets, gold does not carry credit or counterparty risk.

  • Serves as a hedge when other asset classes fail to perform and generate wealth.

  • Plays the role of an effective portfolio diversifier.

  • Protects the purchasing power of your money when the real interest rates in the economy are low or negative for a very long time and inflation pressures exist.

  • Commands a store of value in times of socio-macroeconomic and political uncertainties.

  • Protects against unprecedented global adversities, as it did during the COVID-19 pandemic.

Investment in Gold in 2021.
(Image source: pixabay.com; photo created by hamiltonleen)
 

In the last 75 years since India's Independence, gold has generated compounded annualized returns of +8.8% (as of October 11, 2021) --that's an impressive +52,819% absolute return! The price per 10 gram of gold around India's Independence was Rs 88, and today it is close to Rs 47,000/10 grams (as of October 11, 2021).

The question that arises now is, should you buy gold at these elevated levels this Dussehra?

Well, since the peak of August 7, 2020, the precious metal, gold, has corrected a little over -16.1%. This correction provides some margin of safety and thus an attractive opportunity to buy gold this Dussehra.

However, keep a longer investment horizon (over 5 years) while buying gold and be ready to assume moderately high risk.

Graph: Gold displays its lustre in the long run

Graph: Gold displays its lustre in the long run
Data as of October 11, 2021
(Source: MCX, PersonalFN Research)
 

So far on a year-to-date basis, gold has corrected around -6.5% in the calendar year 2021. Thus, do not expect stupendous returns from gold in the year 2021, as you witnessed in the calendar year 2020 and 2019 when gold clocked an absolute return of +28.2% and +23.9%, respectively.

Buoyant equity markets in other major economies supported by enough liquidity, rise in bond yields in the U.S., the brighter economic outlook for the fiscal year 2021-22, increase in COVID-19 inoculations, drop in the number of new cases of COVID-19, relaxation in COVID-19 restrictions, the uptick in economic activity due to phase-wise opening, and strength depicted by the U.S. dollar are some of the factors that have taken the spotlights away from gold.

What to expect going forward?

Going forward, the key factors that would decide the future course for gold are mainly inflation and interest rates.

The U.S. Federal Reserve recently indicated that it would begin a bond-buying taper (from USD 120 billion per month) by the end of the calendar year 2021 (as soon as November), as long as the U.S. job growth through September is reasonably strong. Plus, the latest policy statement revealed that 9 out 18 Federal Reserve officials were ready to raise interest rates next year in response to rising inflation in the U.S.

That being said, the U.S. is planning to spend USD 1 trillion on infrastructure development. Also, a bigger spending plan to tackle climatic changes and enhance the social security net of Americans is under consideration. Amid such massive spending, in my view, the U.S. Federal Reserve would change the accommodative policy stance very cautiously and raise interest rates gradually in a calibrated manner.

Other than that, gold prices could be propped by the following factors:

- The risk of multiple waves of COVID-19 (given that the virus is mutating)

- A slump in economic growth

- Intensifying geopolitical tensions

- The rise in stock market volatility

- A high debt-to-GDP ratio in many parts of the world

- Inflation risk

In my view, it makes good sense to buy gold strategically and be a smart investor. Keep in mind, historically gold has often rallied in periods of high inflation, economic uncertainty, and geopolitical risks. As these risks persist, gold will remain one of the most sought-after avenues among smart investors.

The long-term secular uptrend exhibited by gold is something that you cannot ignore. It highlights the importance of owning gold in the portfolio as a portfolio diversifier.

Allocating around 10-15% of your entire investment portfolio to gold and holding it with a long-term investment horizon will be a smart and sensible strategy. Instead of buying physical gold, you may consider investing in gold 'the smart way' through gold Exchange Traded Funds (ETFs) or gold savings funds or Sovereign Gold Schemes.

So, go ahead and buy gold this Dussehra.

Happy Investing!

 

Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter

 

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