Coronavirus Outbreak: Is It A Good Time To Add Gold To Your Portfolio?
Rare coins and gold bars are arranged for a photograph at Bullion Trading LLC in New York, U.S. (Photographer: Chris Goodney/Bloomberg)

Coronavirus Outbreak: Is It A Good Time To Add Gold To Your Portfolio?

Gold is considered a safe haven, an investment in times of crisis. That’s because it’s relatively less volatile than the other asset classes and has, by and large, preserved wealth. This time, it has been volatile.

With markets globally in a tailspin amid Covid-19 pandemic stalled trade, gold is not exactly performing the role it has in the past. The uncertainty that permeates the equity and credit markets is also seeping into the yellow metal.

“Gold has become like any other commodity. In other times of crisis, gold was looked at as a safe haven,” said Arvind Sahay, chairperson of India Gold Policy Centre, a research arm of the World Gold Council. “That doesn’t seem to be the case this time around because of the real suddenness in the fall in asset prices.”

If you look back, going all the way to 1933, this kind of suddenness of fall has not happened. In less than 40 days, all the indices are down by anywhere from 25-40 percent. That is the reason for the volatility (in gold prices).
Arvind Sahay, chairperson of India Gold Policy Centre

International gold price is above $1,600 per troy ounce, having recovered from a sharp fall last week to levels below $1,500. Prices in India fell to Rs 38,000 per 10 grams from above Rs 45,000.

“The fall in all asset classes has led to margin calls and has been the primary reason for the fall in gold in recent times,” Prathamesh Mallya, chief analyst, non-agri commodities and currencies at Angel Broking, said in an emailed response. “Moreover, the investor belief in the dollar and its recent upmove is the testament of the fact that the dollar assets are most sought after in the world full of uncertainty.”

This early decline in gold this time is not unique though. Even in 2008, gold initially fell because of volatility before recovering into a multi-year rally till 2011. Bloomberg reported quoting analysts that the parallels with 2008 suggest there’s a good chance that gold will bounce back strongly after this month’s pummeling.

(Source: Bloomberg)
(Source: Bloomberg)

While the long-term prospects of gold continue to be strong, the major determining factor over the next month will be the rate at which the novel coronavirus spreads in the U.S. and in India, he said.

The U.S. has reported nearly 43,000 confirmed cases and 542 deaths, according to Bloomberg. In India, despite stricter countermeasures, the number of people infected by the pneumonia-causing virus more than doubled over the past four days to more than 500.

Sahay said if the number of infections and deaths rise more than expected in the U.S. and India over the next month, there will likely be a sharp fall in all markets including gold. But if the international gold price falls significantly, the commodity will likely see buying because other factors continue to remain in play—accumulation of gold by central banks, global macroeconomic uncertainty, tension between the U.S. and China, and the high likelihood of a global economic recession, he said.

The India Gold Policy Centre had in 2018 projected that prices would rise consistently till 2020 and would test levels of $1,600-1,900 per ounce. This forecast holds true barring a major deviation from expectations on the spread of the coronavirus over the next month, Sahay said.

Sanctum Wealth Management concurs. In response to an emailed query from BloombergQuint, a spokesperson said the investment adviser is overweight on gold.

“The technical trends also seem to favour the decision. We are following suit in our model portfolios. We are trading in short term debt/liquid for further overweight in gold,” it said.

Also read: Gold Investors Are Betting That It’s 2008 All Over Again

What Strategy To Employ

According to Gautam Kalia, head-investment solutions at Sharekhan, the best strategy is asset allocation to meet both short- and long-term goals.

In a base case, an investor should have an exposure of 60 percent to equity, 30 percent to debt, and 10 percent to gold, but this changes based on each individual’s financial goals and risk appetite.

With equity markets having fallen so dramatically, it is natural for the equity component of investors’ portfolios to fall as well. In this scenario, Kalia said, the investor should move funds from debt and gold into equity to bring the equity component back up.

“Following the asset allocation principle forces investors to buy assets when prices are low,” Kalia said.

Most financial planners advise that gold should not form more than 10 percent of the portfolio. Kalia advises that if an individual does not have any exposure to gold, now would be a good time to add in digital form. If an investor has a much more exposure to gold, it might be a good idea to sell and invest in equity, he said.

Also read: Gold Faces Historic Squeeze With Virus Threatening N.Y. Shortage

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