Move to gold amid selloff in Indian equity markets, says WGC

In this country, the benchmark S&P BSE index has fallen a little over five% this month

The ongoing selloff in Indian equity markets has opened an opportunity for portfolio diversification in favour of gold, to reduce risk and aim for better return.

So argues the World Gold Council (WGC), official market development body for the metal's mining industry.

In this country, the benchmark S&P BSE index has fallen a little over five per cent this month. Since its recent high of 36,283 on January 29, the decline has been 6.8 per cent to Thursday’s 33,820. The National Stock Exchange’s Nifty 50 has fallen 6.7 per cent from its recent high of 11,130 on January 29.
 

As a norm, a selloff in equity market brings safe-haven buying in other instruments, including gold. However, the current selloff has not reflected any such trend. The price of gold at Zaveri Bazaar here is up only 0.6 per cent to Rs 30,415 per 10g. In the world market, it is trading 1.2 per cent lower at $1,324 an oz since January 29.

“Gold has often acted as a portfolio hedge in market downturns and the recent pullback was no exception. But, gold's effectiveness improves when market corrections are wider or sustained for longer. In our view, the recent selloff is a good reminder that gold can deliver returns and reduce risk in portfolios,” says the WGC in its latest report, issued on Thursday.

Gold acts as a diversifier and investors often use it to protect portfolios during market downturn. Initially, the gold price did not move much. But, as stocks tumbled, gold rallied strongly, even outperforming short-term treasuries. Gold had joined the equity rally over the past two years, with 12 per cent and five per cent returns in rupee terms during calendar 2016 and 2017, respectively. The BSE Sensex rose two per cent and then 28 per cent in the two years.

“The ongoing selloff in equity is considered a correction. Usually, investors square off their positions in alternative asset classes to meet their fund requirement in an equity selloff. The equity market has not yet reached that level,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.
 

So far, 2018 has been a good case in point of gold’s role as a strategic asset. It has been one of the best-performing among asset classes, besting treasuries and corporate bonds. It has served as a diversifier and liquidity source as stock markets tumbled.