The best time to buy any asset is when its price is low. Gold is in a kind of short-term bear cycle after making a new life-time high in August this year. This provides a perfect opportunity for long-term investors to accumulate the yellow metal.
It’s even better that softness in the gold market is coinciding with Diwali – the festival of light and prosperity.
Most experts and analysts believe that the long-term fundamentals of gold are intact despite a lacklustre performance in the last three-months. In fact, on Monday gold saw its biggest sell-off in the last seven years after Joe Biden secured victory in the US presidential election.
This ended a big geo-political uncertainty leading to rally in riskier assets such as stocks, emerging market assets and a sell-off in safe havens such as US government bonds, gold and other precious metals.
On Wednesday, gold was trading at US $1871 to an ounce in the New York futures market, down nearly 10 percent from its record high of US $2089 made on August 8, 2020.
So obviously gold has underperformed equities by a big margin in the last three months. This would have disappointed many gold buyers but they should remember that their investment is still in the money on a long-term basis.
Despite its sharp V-shaped rally post March, equity markets have just about made-up their losses in February and March this year are up just around 5 per cent in the last 12 months and around 20 per cent in the last three years.
This translates into annualised returns of 19 per cent for gold investors in India.
Long-term fundamentals intact
There is no guarantee that the next three years would be as good as the last three years. Yet, it's almost certain that the yellow metal could be a better hedge against inflation and rupee depreciation than stocks.
Inflation and currency depreciation eats away the purchasing power of our income and wealth needs to be hedged against.
The long-term rally in gold has been fueled by a steady rise in money supply in major economies, especially the United States and the process continues. For example, the money supply in the United States has jumped ten times since 2002 against a 90 percent rise in the country’s nominal Gross Domestic Product (GDP) during the period. In comparison, gold prices have just jumped 5.7x during the period in dollar terms. So gold prices have a lot to catch up with.
Major central banks such as the Federal Reserve, European Central Bank and even the Reserve Bank of India continue to expand their balance sheet, flooding the market with new money supply. At the same time governments are running record budget deficits funded through record borrowings. This has created a lot of macroeconomic uncertainty in the global market and the fear of inflation, which is coming to be true for India at least.
This is a perfect recipe for a sustained rally in gold prices. Not surprisingly many analysts expect gold to touch around $3000 in the next three-years.
Price consolidation in the short-term
This however doesn’t rule out a volatility in the short-term. Most analysts expect gold prices to consolidate for at least a few weeks more before they make the next up move. In the near-term the price is expected to test the 200-day moving average of around $1800 and it could consolidate at that level for some time. This is very typical of the gold market and was last seen in May 2019 and March this year.
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This provides a window of opportunity for investors to accumulate gold and reap gains over the long-term.
Stock prices made a fresh life-time high early this week largely on the back of the hope of a faster turnaround in corporate earnings even though actual earnings are still 15 percent lower than the peak. This raises the downside risk that can be perfectly hedged by investing a part of your portfolio in gold.
And what can be a better occasion than Diwali and Dhanteras for rebalancing your portfolio. Happy investing and wish you a safe and prosperous Diwali!
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).