Worried about equity mayhem? Gold can come to your rescue
But away from all the glare, gold is taking spotlight -- gradually.
Investing in this long considered safe haven is finding many takers as the price trajectory looks set to move north.
The yellow metal has corrected 8-10 per cent and central banks, wary of global uncertainties, are doubling down on gold. By the end of first half of 2018, they bought $1.36 trillion worth of gold, around 10 per cent of the worldwide forex reserves, according to the International Monetary Fund (IMF).
“Central banks globally are buying gold in order to diversify, because China and Russia have taken an aggressive stance and are shedding US treasury holdings. So, the only way they can diversify is by putting their money in buying gold," Kunal Shah, Head of Commodities Research, Nirmal Bang, told ETmarkets.com.
The above chart shows the extent of rise in gold reserves by the central banks. "The extension of EM (emerging market) foreign reserves has led to a net gold demand by central banks – approximately 500 tonnes each year – as they seek diversification and liquidity," said the World Gold Council in a statement.
Analysts too remain sanguine about gold prices.
“Gold is likely to reclaim $1,330 an ounce mark on Commex and Rs 33,500 on MCX. Keep buying gold on MCX as and when it comes to the vicinity of Rs 28,800. If gold is held for 2-3 years, one can expect decent returns,” said Tarun Satsangi, Head-Commodity and Forex Research, Globe Capital Market.
Gold's status as one of the best hedging tools is mainly linked to the fortunes of the dollar, and by extension to the US economy. Analysts say it's just a question of time before the yellow metal gets its mojo back.
They have a reasoning to believe so. "The European Union will start growing better than the US. The moment the EU starts hiking rate, the rate differential will come down, making Europe a better destination for investors," added Satsangi.
Additionally, the yellow metal tends to follow a long cycle. Between 2000 and 2011, it gave multi-fold returns and there has been a steep fall ever since.
And the yellow metal always thrives in times of uncertainty. “Be it the US-led war on Afghanistan in 2001 or the Iraq war in 2003, the US witnessed a surge in money supply, leading to a dollar crash and subsequent inflation. This was followed by the 2008 Lehman bankruptcy when spot gold in Australian markets rose 2.5 per cent, or $18.70, to $782.15,” said Gnanasekar Thiagarajan, owner, Commtrendz Research and Fund Management.
Shah also sees China factor at work. A slowdown in China, according to Shah, is driving a deflationary trend elsewhere, which is keeping commodity prices depressed.