The COVID-19 pandemic and its severe impact on livelihoods due to lockdown has thrown the world economy in an unchartered territory. And it has also altered the way we look at investments to cushion ourselves from future shocks. Coronavirus has severely hurt traditional assets classes, forcing savers and investors to either book losses or settle with meagre returns that don’t even cover loss of purchasing power due to inflation. In such a scenario, gold is an effective bet.
Once investors’ favourite, real estate is now in the doldrums.
Housing prices are down across the country as demand for homes has vanished due to the lockdown. There is little chance of a quick recovery in the sector given job losses and cut in salaries, thanks to the virus.
Equity markets on the other hand remain choppy and the rally has become very narrow. Most of the gains in share price since March 2020 lows have been due to few stocks making it tough for the majority of investors to make money. The market future direction remains uncertain given contraction in India’s Gross Domestic Product (GDP) and corporate earnings in FY21.
The investors in fixed income assets such as bank fixed deposits and bond mutual funds are up against central banks which are relentlessly cutting interest rates to lower government’s borrowing costs.
Interest rates in India are down nearly 200 basis points in the last three-years and are now lowest in a decade hurting savers.
In contrast gold continues to do well despite the economic scare caused by COVID-19 pandemic. For example, gold prices were up 35 percent in India during 12-months ending March 2020 – its best performance in 14 years, according to data from the World Gold Council.
In comparison, the benchmark BSE Sensex ended FY20 with losses of 24 percent, erasing three years of cumulative gains made by equity investors.
The long-term outlook on gold remains bullish given the recent global economic developments.
Most governments and central banks have responded to the COVID-19 economic crisis by increasing public spending and expanding the money supply dramatically. This raises the fear of inflation later this year especially in a country like India. Exchange rates are also expected to be volatile creating another layer of uncertainty for the global economy.
This is good for gold investors as historically yellow metal has been a good hedge against inflation and currency depreciation.
The data suggests that the yellow metal has been more than faithful to long-term investors.
In the last 10-years, gold price (valued in rupee terms) has appreciated at an annualised rate of 9.3 per cent against 5.3 per cent annualised appreciation in BSE Sensex during the period, as per data from WGC.
In other words Rs 10,000 worth of investment in gold in April 2010 has appreciated to around Rs 35,000 at the end of March 2020.
In the same period, an equity portfolio of Rs 10,000 appreciated to Rs 20,600.
The long-term movement in gold and equity prices also suggests that long-term return on equity is falling for now while its improving for gold. (See the chart on 10-year rolling returns on equity and Gold).
Most Indians are currently under invested in gold and over invested in equity and fixed income. It’s time to rebalance your portfolio by increasing the share of gold and reducing the proportion of equity and fixed income. However, this doesn’t mean a 100 percent switch to gold.
You still need equity and fixed income in your portfolio as diversity always helps.
For any queries on personal finance, you can write to Editor@30Stades.com
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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