Is Gold Still A Strategic Asset Class For Your Portfolio? Know Here…   Jan 24, 2018


gold-a-strategic

Recently, India’s Prime Minister delivered a speech at the World Economic Forum—the highest platform to shape global, regional, and industry agendas.  Subtly, he criticised protectionist trade policies adopted by some developed countries and raised concerns about the shrinking globalisation.

He also presented India as a rapidly growing economic power with the potential to drive global economic growth.

Many global and industry leaders might be on the same page with India’s Prime Minister on a variety of economic issues that world faces today.

Global financial crisis punctured the wheel of global growth and in its aftermath, the protectionist policies became prevalent in the developed economies.

Loose monetary policies in the advanced countries created an inflationary pressure in the developing world, and as a result, many small export-oriented economies toppled.   

Shrinking globalisation is a real threat to the global economy, indeed. When the advanced countries suddenly change their economic policies, the role of developing countries are challenged. They are left with no option but to re-adjust their policies.

In this transitionary phase, uncertainty rises unprecedentedly and investors feel the heat.

Gold——a strategically important asset——helps them tide over a period of difficulties. As per the World Gold Council data, the precious yellow metal has generated 10% returns on an average every year since 1971——making it one of the steadiest assets.  

Nonetheless, many of us have short memories. We often focus on the short-term performance of an asset class. In the case of gold, the short-term performance isn’t very encouraging. Since the precious yellow metal has generated lacklustre returns in the recent past, many have started shunning this must-have asset.

Lately, the global growth has accelerated and interest rates in many developed economies are rising steadily, confining the movement of gold prices.    

Now the crucial question is, with an increase in growth across the globe and normalisation of monetary policies across the board, has the role of gold reduced in the investors’ portfolio?

The shortest and the most sensible answer is ‘No’.

Gold plays a role of a portfolio diversifier. This, basically, means your portfolio would benefit from holding 10% to 15% in gold.  Besides, helping you deal with global uncertainties, gold also enables you to generate higher inflation-adjusted returns.

How the future of gold looks like?

In 2018, central banks in the developed economies are likely to further withdraw monetary policy support. So, it’s a possibility for interest rates to move upwards.

As per various estimates, the Federal Reserve (Fed) is likely to increase interest rates three-four times in 2018. Rising energy prices, medical costs, and rents are expected to push the inflation higher in the world’s largest economy–––the US.

Further, proposed tax cuts may prove to be inflationary. In short, all the indicators appear favourable for the Fed continuing to adopt a hawkish stance going forward.

Excess liquidity in the global financial system may witness a retreat owing to some of the biggest central banks of the World. ECB and BoJ may withdraw their support to the respective economies, subsequently aligning their policy stance with the Fed. As a result, gold prices may continue to remain under pressure.

Coming to geopolitical tension, which has been the main driver for gold to exhibit sheen; the US has shown its willingness to reach out to North Korea for diplomatic resolutions. However, it expects the latter to first create a conducive environment for talks to be fruitful. If the US manages to get China on its sides and further isolate North Korea, the warmongering situation may ease out.

China and Russia may never want a strong presence of the US on the Korean Peninsula. They are likely to play the role of interlocutors in the US-North-Korea negotiations. If the geopolitical situation becomes unexpectedly worse, then gold is likely to find support from the smart investor who shall approach it as a safe haven; a store of value during uncertainty.

But a strong greenback may hold back from going aggressive. If 2017 marks the end of a multi-year period of US dollar strength, then gold could benefit from that tailwind.

The global rally in equities will also decide in which direction money flows, paving the path for the precious yellow metal.

What should Indian investors expect?

Demonetisation and GST are believed to have negatively affected the gold demand in India. In 2017, the demand during the festival season was relatively weak.

As Indian equities by and large have generated over 25% returns in 2017, the precious yellow metal has not caught much attention of investors.

In the last two quarters, India' gold imports have been falling…

Sagging gold imports suggest that, even at lower prices, incremental buying has not seen traction. It is estimated that in the last quarter of Q4’17, India’s gold imports will possibly fall; but wedding purchases in the last leg of the quarter still remain a beacon of hope for gold’s demand. 

As you may be aware, India’s fiscal deficit touched 96% of the full year target in the first-seven months of the current fiscal year. India’s current account deficit (CAD) too has widened yet again on rising imports: In the September quarter, CAD doubled to 1.2% of GDP or US$ 7.2 billion.

Rising crude oil prices in the global markets has caused the oil import bill to balloon. During such times, the government is likely to discourage higher gold imports as it could worsen the deficit situation.

What you, investors, could do is…

Considering the following factors at play, continue to invest in gold at regular intervals:

  • International crude oil prices are escalating
  • There are upside risks to retail inflation
  • India’s economic growth rate although has nosed up, needs to sustain for it to be called a trend reversal
  • Path to fiscal consolidation could be disturbed and a derailment from the targets is likely
  • The Brexit process is underway
  • China’s macroeconomic indicators are wobbly
So, be a smart investor, continue to take refuge with gold. During such times, gold will prove its trait of being a safe haven. 

Remember, the precious yellow metal as an asset class is an effective portfolio diversifier and a hedge. The long-term secular uptrend, exhibited by gold, is something that invites attention and highlights the importance of owning gold in one’s portfolio with a longer investment horizon.

At  PersonalFN, recommend allocating at least 10% of your entire portfolio to gold and holding it with a longterm investment horizon. It will be a prudent strategy.

But buy gold the smart way, via: gold ETFs, gold saving funds, sovereign gold bonds, and/or e-gold. Remember, buying the yellow metal in paper form has many advantages, which you miss out on  when you buy gold in the physical form.

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