Rally in Equities Takes the Shine off Gold Investment

An astounding bull run in local equity markets amid the Covid-19 pandemic has taken the shine off gold-historically, one of the most in-demand assets during a crisis.

Portfolio managers say there is no immediate trigger for a spike in gold prices and the yellow metal should ideally be not more than 10% in one’s investment portfolio as the economy is showing signs of recovery.

Last years, when gold prices had crossed Rs. 56,000 per 10 gm, investors had increased their exposure to 15-20% of their portfolio in anticipation that gold will cross the Rs. 60,000 per 10 gm mark.

But that didn’t happen as investors big and small have shown a strong risk appetite by opting for equities for the last several months despite the Covid-19 situation, betting on the country’s strong growth potential.

Gold October future contract at MCX closed at Rs. 47,166 per 10 gm.

“It is imperative to not that gold as a safe haven may not always be a good investment as investors seeks out safe haven to limit their exposure to losses in the event of market downturns,” said Prashant Joshi, co-founder of wealth management firm Fin trust Advisors.

“The gradual distancing from gold indicates that uncertainties are on a decline as far as the investing world is concerned, which is reflected in declining gold prices and increased flows towards equities.”

He suggested capping gold exposure at 10% of one’s investment portfolio. “If it is sub-10% then one should buy in such times in a staggered manner, and if at 10%, then maintaining it is ideal for portfolio diversification,” Joshi said.

While there is uncertainty over the economic impact of a likely third wave of Covid-19, experts said it is highly unlikely for Indian and global economies to slip into a recession with the pace of vaccination picking up.

“We remain very much convinced about a continued economic recovery and a temporary inflation spike, causing a further fading of safe-haven demand for gold and leading prices some-what lower,” said Carsten Menke, head of next generation research at wealth management firm Julius Baer.

“While the expected weakness of the US dollar should provide some support to prices, it should not be sufficient to offset the fading of Safe-haven demand.”

Kishore Narne, head of commodities and currencies at Motilal Oswal, said gold acts as a hedge against inflations and, therefore, an exposure of 10% in a diversified investment portfolio adds value. “The rally in gold is expected to come again beginning next year,” he said. S-ET

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