Gold: Enter now if you can hold for 7-8 years, maintain allocation

New investors should also minimise entry cost by purchasing on corrections

On Tuesday (August 11), gold closed at $1,912 per ounce in the international market, 5.7 per cent lower than its previous day’s closing price. It has since recovered 1.8 per cent to $1,947 per ounce (Rs 52,662 per 10 grams in the Indian market). The yellow metal’s extended bull run appears to have been halted temporarily. While gold prices might continue to climb, the journey henceforth could be more volatile.

This week’s correction was triggered by news of Russia launching a vaccine against the Covid-19 virus. Easing of US bond yields, firming up of the dollar index, and profit-booking by traders also contributed. The primary reason, however, was the steep run-up witnessed this year. “No asset class can keep moving up in a straight line. A correction was overdue,” says Chirag Mehta, senior fund manager — alternative investments, Quantum Mutual Fund. Such corrections, according to him, are a part of every bull run. “Seven large corrections occurred during the 2001-2011 rally,” he adds.

Low or negative interest rates, both on a nominal and real basis are expected to continue for a long time, and that is expected to keep the gold rally going. After the 2008 crisis, real interest rates in the US remained near zero for six years. This crisis has been more damaging in terms of job losses. So, central banks are likely to continue with their accommodative stance for longer and that will support gold. Low or negative bond yields are forcing even fixed-income investors to allocate to the yellow metal. Also, if money printing by central banks fuels inflation, investors will still flock to gold for its inflation-hedging property.

The high level of fiscal support being provided by the US government could lead to a further rise in its deficit. Countries might also choose to maintain their reserves in a currency other than the US dollar. These factors could cause the dollar to depreciate. Since gold is priced in the US dollar, weakening of the latter will drive up the price of the former.  

The pandemic continues to pose a serious threat. “Both the number of cases and the death toll are still rising. The threat of a global economic recession remains, the 20.4 per cent shrinkage in the UK’s gross domestic product in the April-June quarter being one instance. Western countries could also be hit by a second wave of the pandemic with the onset of winter,” says Ajay Kedia, director, Kedia Commodities.

Gold prices could, however, be more volatile in the future. “If a more reliable vaccine is launched, or the number of cases starts plateauing or falling, money could move out of gold, causing a steeper and longer-lasting correction,” says Arnav Pandya, certified financial planner and founder, Moneyeduschool.

Long-term investors should maintain a 10-15 per cent allocation to gold. Those whom the rally has made overweight on the yellow metal should rebalance. New investors should buy on corrections, staggering their purchases over 6-12 months. They should enter with at least a seven-eight-year horizon so that they can ride out the next bear phase.