Gold Returns Up By 25% This Year: Is Now A Good Time To Buy Or Just Hold?

July 14, 2020

The thing that's been glittering and sitting on your portfolio is gold. If that's the case, you must be quite pleased with yourself. In case you forgot to check, the prices of gold have appreciated up to Rs 49,240 for 10 grams in the spot market – registering a spike of 41 percent in the year ended July 9, 2020.

The rising prices of gold have been attracting investors for quite some time now. It is during uncertain times and when there is a market strain that asset classes such as stocks and real estate falter. The situation makes it hard for investors to look away from the precious yellow metal. So now, the important question stands: Should you buy more gold or have gold prices reached their peak?

Why Gold Prices are Rising

Gold becomes more valuable in times of crisis or uncertainty. And the year 2020 has been moving forward through uncertain territories. The coronavirus pandemic has pushed investors, mainly from North America and Europe, to accumulate gold.

Gold accumulation from western markets has helped push prices in the international market to a new eight-year high.

The demand for gold funds from secondary markets such as the US and Europe have evened out the collapse in demand for physical gold among large consumers in China and India.

As a “safe-haven asset," gold is expected to keep its value or even increase in value during times of market challenges when most asset prices decline. Lockdowns to contain the spread of COVID-19 have led to unprecedented fears of a slowdown in the global economy.

Also, significant world events triggered by activities among powerhouse nations such as the US and China also affect asset performance. Geopolitical risks such as the ongoing tensions between China and India aggravate the risk perception of investors. Also, the upcoming Presidential US Elections, as well as the trade dispute between the US and China, further suggest an uncertain (if not challenging) future ahead of us.

Aside from cross-border and economic factors, another important driver of gold price is the significant increase in the money supply in the global economy. The introduction of more liquid assets has led to lower interest rates reaching near-zero positions in developed economies. This, too, has made investors invest in gold.

Increased Demand in Gold Drives More Money in the Market

Given the current situation, global investors are loading up on gold. In June, exchange-traded funds (ETFs) backed by gold have seen the highest holdings at 3,621 tonnes. The gain was priced over $200bn as per the latest data released by the World Gold Council.

During the first half of 2020, global net inflows in gold ETF stood at 734 tonnes, priced at $39.5 billion. Inflows into ETFs backed by gold have surpassed retail purchases in key markets during the first quarter of 2020 - a first since 2009.

According to Bloomberg, China, and India, the world's biggest gold consumers, will slow down on gold consumption by 23% and 36%, respectively.

The drop in gold demand from the two key markets came after the pandemic stalled imports and closed non-essential shops leading to job losses and subdued consumer spending on weak economic growth prospects. India, which is dependent on imports for most of its demand for gold, has seen a 99% decline in its imports in April and May.

On the other hand, spot gold, the international benchmark for gold prices, has seen an increase of 17% in 2020. At the close of June, gold futures on Comex have breached the $1,800 an ounce mark for the first time since 2011, driving rates in India and other Asian markets.

Due to this phenomenon, Indian investors are also loading up their investments with gold. According to a monthly report from the Association of Mutual Funds in India, net inflows in gold ETFs started at Rs 2,040 crores in the first quarter of the financial year began on April 1, 2020.

Since the start of the year, investors have invested Rs 3, 530 crores in gold ETF. Gold ETFs follow the prices of gold and have delivered 41.6% returns over one year ended July 9, 2020, according to Value Research.

Fear-driven investment demand in developing countries, according to a Goldman Sachs report, accounted for 18% of gains in gold prices. In contrast, weaker buying by emerging-market consumers provided an 8% drag.

How long can gold's dazzling performance hold up?

Despite gold's proven strength in times of uncertainty, you should treat your allocation to gold with caution. Use this time to ensure that you are holding on to a diversified and balanced portfolio, which consists of gold along with other liquid and blue-chip assets.

We've seen a significant drop in demand for physical gold (jewelry and bullion) due to the loss of employment and income of end-users in key markets.

Do not haphazardly correlate past returns delivered by gold to future prices. Allocating 3-5% of your portfolio to gold makes for a safe position against market stress and economic meltdowns.

Blue-chip assets such as gold, work best as a hedge to lower your overall portfolio risks. Anything remarkable, if only for the short term, should not compel you to take long-term risks. In the same manner, do not get carried away by the recent price performance of gold.

At this point, gold prices could go either way. Prices of the precious yellow metal now hold a risk of losing support if ETF inflows slow down. Rates could also pick up if demand in China and India get back on track.

Smart investors, however, will not sink a large part of their portfolio in gold out of fear. Instead, they concentrate on their long-term financial goals and use market dips to buy high-quality stocks and ETFs for revenue.

No matter how inclined you are to rely on the notional security of gold, it is best to ignore the short-term market noise altogether. Focus on maintaining your investment diversified and balanced. And finally, stick to your financial goals and investment time horizons.

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Charles Stevens is Chief Operating Officer of Bullion Box Subscriptions. Charles oversees operations at Bullion Box Subscription, an industry-leading precious metal retailer: curating gold, platinum as well as silver bullion and coins. 

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.

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