Gold likely to move higher in Samvat 2076; make a strategic allocation

While in the near term, gold can remain range-bound as there are various conflicting forces at play, there are triggers that can propel prices higher in the long run

Investors who put in money in gold as an asset class have reaped a good harvest with prices moving up nearly 22 per cent thus far in Samvat 2075. However, the run-up should not deter investors from investing in the yellow metal in Samvat 2076.

Following the remarkable rally over the last few months, gold prices are now consolidating. While in the near term, gold can remain range-bound as there are various conflicting forces at play and no single factor seems to influence the price direction, there are triggers that can propel prices to higher levels over the long term.

Despite the short-term fixes, trade wars are far from over. Furthering his protectionist agenda, US President Donald Trump has now slapped tariffs on the European Union (EU) in addition to China. With retaliation expected from Europe, global economy can destabilise further. The coming election year in the US just adds more uncertainty and integrates further unknowns, since Trump will now be motivated to do things that add to his popularity. In the near-term, any respite on the trade war front will reduce the pressure on central banks to act fast and this could cause some pull-back in gold prices. However, over the long term, the clash for supremacy enacted through trade wars is expected to intensify.

On its part, International Monetary Fund (IMF) has revised down global growth projection for 2019 to 3 per cent – a new post Global Financial Crisis (GFC). The global economy now seems to be in a synchronised slowdown. 

Manufacturing data of major economies continues to slide and is now slowly beginning to spill over to the service sector. There are chances that the global economy may enter into a recession within the next one – two years. Lowering interest rates has historically been the first line of defense for global policy makers when staring at a recession. Typically, rates have been lowered by 3 – 5 per cent in response. That said, the current rates are not high enough to drop without going negative. There is currently $17 trillion worth of negative-yielding government debt and much more on a real interest rate basis.

Given the macroeconomic backdrop, investors should be prepared for further rate cuts and quantitative easing (QE) programs by major global central banks. As these unconventional measures get exhausted, the last stage could be currency debasement. For that to happen, rates would need to be taken deeper into negative territory as economies compete for the weakest currency. A full blown currency war remains a real possibility, which would be incredibly bullish for gold.

Fundamentals remain intact

The main reason we believe that gold’s fundamentals are intact is because of the flawed (monetary) policy, which suggests economies can be made stronger via more monetary inflation, credit expansion and more government spending. 

There still exist serious imbalances and problems in many countries, including excessive private and/or public debt, the unsustainable divergence between record corporate profits and steadily declining wages, rising inequality, and mispricing of asset markets at best. It is futile to think that easy money and higher asset prices can really be a solution to the current economic problems. We are in a phase of experimental central banking, which is likely to end badly due to the dislocations of capital it has caused through prolonged periods of easy money. Long-term trends in gold prices are driven by changes in the overall level of confidence in the monetary system and the economy. Make a strategic allocation to gold as it is the counterweight to paper money, which continues to lose credibility as a store of value. We suggest an allocation of between 10-15 per cent of one’s portfolio and using corrections to add in a systematic manner.

(Chirag Mehta is a senior fund manager for alternative investments at Quantum Mutual Fund. Views are his own)