Take advantage of low gold prices, maintain 10-15% allocation: Expert

After rallying to record highs at the peak of the Covid-19 pandemic in last August, gold began to retreat from November, thanks to breakthroughs on the vaccine front. Optimistic about the end of the pandemic and upcoming economic recovery, investors rushed towards risk assets, putting gold out of favour. This was despite the ultra-accommodative monetary and fiscal stance of governments and central banks the world over, which are fundamental drivers of gold prices.
 
Since the beginning of 2021, gold has been under further pressure on account of the US dollar and US bond yields, which have strengthened on the expectations that a quick US economic recovery will trigger inflation, especially with the US Federal Reserve insisting on keeping interest rates near zero till 2023.
 
But just when investors were beginning to underestimate gold’s role in the investment portfolio, the macroeconomic situation has again turned favourable for the asset class. The monetary metal has bounced back from recent lows, with the dollar and yields cooling, and is likely to strengthen further.
 
With many countries, including India, now seeing a resurgence in Covid-19 cases, risk and uncertainty on the pandemic front are back. New waves and variants of the virus are taking a toll on the nascent economic recovery, which could trigger pullbacks in risk assets like equities. Gold could benefit from this, just like it did last year.
 
Though the vaccine roll-out will definitely cushion us from Covid-19’s impact this time, there’s a long way to go before the majority of the population gets immunised. For instance, as of last week, only 1 per cent of India’s population has been fully vaccinated, i.e. received both doses. Till then, lockdowns are the only way to control the spread. Besides, the safety and efficacy of these vaccines remain concerns.

 
Given the lingering health and economic crises, central banks around the world, led by the US Federal Reserve, will continue to stay accommodative to support growth, which means interest rates will stay low for longer. This will continue to support the demand for gold. The ongoing stimulus measures by governments to support their economies have set the stage for higher inflation as money trickles down to the real economy. Gold, which tends to do well in times of higher inflation, will become a preferred asset. Real interest rates, which is interest rates minus inflation, are likely to remain low to negative as a result of lower rates and high inflation, which should potentially lead to higher gold prices. And lastly, gold’s competitor, the US dollar, will be under pressure as the pandemic relief measures over the last year will debase it and add up to the massive debt of the USA. This will be bullish for gold.
 
Domestic demand for gold could be impacted in the near term by the second wave of Covid-19 and resulting restrictions, but the financially efficient forms for owning gold are fast gaining traction. The Indian rupee, which has been appreciating over the last few months, has now reversed direction. This will support domestic gold prices.
 
All in all, given the risk and uncertainty on the macroeconomic front and commitment to accommodative policies by global policymakers, investors need to appreciate the strategic role gold can play in a portfolio and should maintain 10-15 per cent allocation to the metal at all times. As of the third week of April, gold prices have just begun inching higher but are still down from 2020 highs. This should encourage bargain hunters and long-term investors to take advantage.
 
The writer is senior fund manager, alternative investments, Quantum Asset Management Company