Needless to say the past few months have been rocky world over. Most nations are under lockdown and several economies across the globe face one of the worst recessions of our times.
In India, it has been over 2 months since the lockdown started. Some states are now gradually opening up. However the scenario following the lockdown will certainly be far from what it was like before Covid-19 took over.
Ongoing geo-political tensions are likely to change fundamental relationships between certain countries. The U.S.-China tensions are expected to worsen ahead of November elections.
So how does Gold figure in all of this, or more precisely what is Gold’s strategic role in our new normal? Historically we have seen there have been multiple instances when geo-political stresses have had their influence on the Gold prices.
In the short run, we may see capped bullion’s gain rallying with the sudden spike in equities as news of easing lockdowns or when businesses getting back on track. However considering the new normal, the world is indeed not going to be the same anymore. Going ahead, investors need to brace themselves for increased volatility in US-China rivalry at least for the next couple of years. Governments have reacted to the COVID crisis by infusing trillions in to their economies, cutting interest rates and announcing monetary stimulus. However, growth continues to lag and market sentiments are still pessimistic. This could result in unrest for the coming few years. As uncertainty prevails in equity and credit markets, it will trigger a risk-averse sentiment and boost investment demand for alternatives like gold.
Unlike the previous economic crisis, COVID – 19 has a deeper impact on the economy. In a world where major changes happen at a glacial pace, the impact of coronavirus has been dizzying. As the scale of the pandemic and its potential economic impact started to emerge, investors are starting to seek safe-haven assets. We expect that higher risks and uncertainty will support gold investment demand. Gold’s remarkable performance of ~+24% in 2019, a year marked by trade tensions between the two largest economies of the world, is recent proof.
The WGC (World Gold Council) recently analyzed the potential performance of gold across four hypothetical scenarios provided by Oxford Economics -
- Swift recovery
- US corporate crisis
- Emerging markets downturn
- Deep recession
The analysis shows that higher risk and uncertainty combined with lower opportunity cost will likely be supportive of gold investment demand in 2020.
New normal follows old advice
Given the new way to look at your investment portfolio, it makes allocation to gold more important than ever. What investors need to do is simply follow the age old advice of allocating a 10-15% to gold in their portfolio. So far in this crisis, gold has played an important role in portfolios as a source of liquidity. As the macroeconomic situation develops, we expect it to play a risk-reducing return-enhancing role in the long term. We reckon that any correction can be a good entry point for investors to accumulate long-term positions. All those who don’t have enough allocation to the tune of 10-15% of their portfolio, should consider an allocation to gold given the fast unfolding macro-economic scenario where economies try to create consumption demand by avalanche of government spending.
When the dust does settles on Covid-19, in all likelihood, we are far off from the semblance of life prior to the outbreak of the virus. Businesses around the globe are definitely going to take time get back on track and to rethink their strategy. In the meantime, an investment in gold that might come to your help, may it be to boost liquidity or to diversify your portfolio.