The festival of lights is a few days away and the Dhanteras Pooja is considered as an auspicious time to invoke Goddess Lakshmi.
Dhanteras is usually an auspicious time to buy utensils, gadgets, jewelry. In fact, some even consider it as an occasion to invest in Stocks and a few grams of Gold.
Although domestic gold prices seem to be increasing in the last fortnight, they have been benign through the last one year. In fact, domestic gold prices are down by as much as 9% in the last 12 months. The number could either excite or disappoint... Meaning, one could either exit the asset class or perhaps the asset allocation increases given this is a cheap entry point. The decision to buy Gold for Dhanteras could be a strategic one.
For those unaware, Gold prices did provide handsome returns to investors through the worst phase of the pandemic. Of course, the yellow metal’s prices have retreated for now which has disappointed scores of investors.
Those who question about the investment in the yellow-metal should look at how the economic situation has steadily improved post the first wave of the infection. The investment sentiment has now changed thanks to the roll-out of successful vaccines and subsequent opening up of economies. Normalization of ultra-accommodative policies, which have been the key driver of gold prices, is thus expected. Sure, that could negatively impact gold prices. But do not discount this multifaceted asset class yet.
Demand for gold comes from various sources like jewelry, bars and coins, investment demand, central bank demand and use in the technology sector. While investment demand through Gold ETFs is showing signs of contraction, consumption demand for gold which usually accounts for ~50% of total demand is improving. Economies of major gold consumers India and China have bounced back from the pandemic induced recession. Consumer incomes and sentiment have improved. A recent report by the World Gold Council reveals that for each 1% increase in gross national income per capita, domestic gold demand in India has historically risen by 0.9%. Pent up demand thanks to lockdowns and postponed marriages is now supporting prices. A good monsoon and the upcoming festive season in India should further aid the uptick in consumer demand.
While the Covid era ultra-accommodative monetary and fiscal stimulus measures have helped bring back consumer demand, they have thrown up a new challenge. Global supply chains, disrupted by the pandemic, haven't been able to match up to the rebound in demand, resulting in prices of goods and services going up. At the same time, major developed countries like the US and UK are seeing fewer people returning to their jobs post the pandemic, which is pushing wages up. Energy prices too have been on the rise as supply accommodates the pent-up demand, pushing up transportation costs of all goods and commodities. All of this is translating to higher global inflation. Gold prices have historically been in line with inflation. As per the World Gold Council, for each 1% increase in inflation from 1990 to 2020, Indian gold demand increased by 2.6%, proving that Indians have used gold to tackle higher inflation.
While on the macroeconomic front, things look cheery now - economies opening up, consumer sentiment and spending improving, stock markets rallying - higher inflation, dissipating growth, and potential effects of tapering are risks to the outlook. Higher inflation could hurt consumer demand and slow down the economic recovery. Corporate earnings supported by low factor costs will be under pressure; as interest rates and inflation inch up, which could result in stock market volatility. Drying up cheap liquidity could unveil debt or housing crises which could spill over to the larger economy. Prevalence of these economic risks demands a 10-15% allocation to gold, which, unlike other mainstream assets, tends to benefit during times of stress and uncertainty, cushioning the overall impact on the portfolio.
The gold market is large, global, and highly liquid. Recent data from the World Gold Council shows that gold is the second most liquid asset in the world after S&P 500 stocks. At the peak of the pandemic last year, savings in gold proved to be a ready source of liquidity for many seeking funds for medical or income setbacks. Gold's liquidity does not dry up, even at times of financial stress, making it a handy and much less volatile asset to own in today’s unpredictable world.
While returns are a major motivation to invest in gold, one should remember that gold’s utility extends beyond that. It is also a source of liquidity, a portfolio diversifier and an asset that can help combat the effects of higher inflation on a portfolio. Buying gold can thus be a good move for your overall financial well-being. As an investor you could follow the tradition's demands and invest in a few grams of Gold and appreciate the yellow metal's strategic role in your portfolio. You could take advantage of the lower prices, and invest in a few grams of gold this Diwali. Preferably through efficient financial forms like Gold ETFs and Gold Mutual Funds.
Chirag Mehta is a Sr. Fund Manager with Quantum AMC.
Disclaimer: This article should not be construed as an offer to buy or sell Gold. Neither Sify nor Quantum AMC is responsible for any loss arising from use of this article. Financial markets are prone to risks and it is advisable that you invest in the services of a SEBI registered Financial Analyst or an experienced Financial Advisor prior to investing in the markets.