Gold may not beat equities in the long run but it is an avenue for wealth preservation in the short term
Gold can be included in one’s portfolio for the short term
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Sleepwalking could best express what gold prices are going through right now. They are rising alright, but in no way that’s exciting or meaningful when you compare them with the pre-2011 period when they seemed to be in an uptrend forever, consistently giving returns above inflation, year after year. Unsurprisingly, gold was touted as a must-have in one’s portfolio. It went up every time an oil pipeline burst in Nigeria, as investors flocked to it as an inflation hedge.
Political tension also made gold more attractive to investors as a hedge against uncertainty. Or it could be the weakness of the US dollar that kindled interest in it. And then, of course, there was India and China’s affinity for physically owning the yellow metal. Until 2011 came along, and pop went the gold bubble. Regulatory changes cramped risk money and disincentivised the purchase of gold, while oil’s decline took away the inflation-hedge appeal. To top it all, the dollar index would rise by over 30 percent in the subsequent years from the 2011 lows, while the stupendous rise in equities ensured that gold held neither investment nor hedge appeal.
Over to today and international gold prices–currently at $1,320 per ounce–are again on an ascent. This begs the question, will gold glitter again with spectacular rallies like before? We do not know yet, but many elements are falling in place.
Gold demand rallied in the last (calendar) quarter of 2017–gaining nearly 20 percent in demand from the sequential Q3 quarter–according to data from the World Gold Council. Full-year gold jewellery demand in the fourth quarter increased by 4 percent–which was the first year of growth since 2013, central bank buying increased, while mining and supply dipped. These supply and demand figures are not inspiring enough to speak about a rally yet, but they are certainly indications.
After the US presidential election results, we saw global gold prices gaining nearly 5 percent. And though the rally lost steam shortly after, it was an assuring sign that gold has begun to respond to events in a similar fashion to the pre-2011 period.
A major hindrance in gold’s revival so far has been the strength of the dollar and the stellar returns given by equities, with the Dow Jones rising nearly four times from the recession lows post 2008.
However, the upcoming 2019 elections will bring volatility to Indian equities, while disruptive policies amidst higher interest possibilities could make US dollar’s trajectory unpredictable. Given the multi-year consolidation, and the revival of gold’s usual price triggers, a stage looks to have been set for a 20 to 30 percent gain in a period as short as one or two years.
But equities remain a better asset class in the longer run. To that end, gold can be included in one’s portfolio for the short term as an avenue of wealth preservation.
The writer is chief market strategist for Geojit Financial Services, a retail financial services firm