Ending decades of a relationship, Britain finally decided to divorce the European Union (EU). Fearing the consequences of this development, capital markets across the globe crashed on the day of the result of the referendum. The English citizens’ decision poses a grave threat to the existence of integrated Europe. Pound nosedived against US$ to a level not seen since 1985. However, gold staged a smart rally. As the risk aversion kicked in, investors chased the safe havens of gold.
Will Gold Rally Further?
Data as on June 24, 2016
(Source: ACE MF, PersonalFN Research)
Why investors prefer gold during uncertainties?
As you might be aware, gold prices increase in sustained phases of economic downturns or when there’s a huge risk to the political stability of a country or a region. During economic downturns, inflation-adjusted interest rates slip in the negative causing erosion of investors’ wealth. The gold maintains its purchasing power in such phases. For this reason, investment demand for gold goes up. On the other hand, geopolitical tensions create an unstable environment for businesses and pushes stock prices down. Moreover, geopolitical tensions often hamper the economic progress of the affected geographies or even the whole world sometimes depending on the severity. This is why the money which flows out of risky assets such as stocks and crude oil among others, takes refuge under the safe havens of gold.
So what’s the uncertainty this time?
When the UK was warming up for the vote, the whole world felt that it would ‘remain’ in the EU. However, the outcome was a shocker. Now there’s uncertainty about the exit process. Moreover, Britain might feel a leadership gap as David Cameron has stepped down from the position of the Prime Minister accepting the responsibility of having failed to convince his countrymen to remain in the EU. The worries don’t end there. Now there’s a growing demand for conducting the re-vote. As reported by The Guardian on June 26, 2016; more than 25 lakh people have signed the parliamentary petition to hold the re-vote. Scotland felt agitated as it now will be out of Europe, if there’s no reconsideration about Britain’s decision to leave EU.
Consequently, there’s also fear that, following the footsteps of the UK, other nations may consider leaving the EU. This might cause Euro to lose further ground against US$. In such a condition the Federal Reserve (Fed) in the U.S. may find it difficult to raise interest rates. Come what may, global capital markets would be on the tenterhooks unless these issues get resolved. The greatest fear is this—if the UK exit triggers the disintegration of Europe, the global economy may once again slip into a recession.
Gold touches 26-month high in India?
Amidst the falling Rupee and strengthening of prices internationally, gold reached a 26-month high in India recently. After the results of UK referendum had been announced, gold spiked nearly 5% in the international markets on the same day. Taking these cues, gold prices in India touched Rs 30,500 mark for every 10 grams. Probably, many investors have been thinking about accumulating the precious yellow metal as the prices have firmed up.
Should you buy gold now?
PersonalFN believes, you should buy gold as a portfolio diversifier rather than buying it to accelerate the portfolio returns. PersonalFN is of the view that, your exposure to gold should be equivalent to 10%-15% of your portfolio. Rather than speculating on the direction of prices, you should accumulate gold in small quantities when prices drop, not when they jump. You might be better off buying gold in a paper form through Gold ETFs (exchange traded funds) or may subscribe to Sovereign Gold Bonds, which carry a favourable tax treatment.
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