“Investors should brace for market turbulence not just till Election Day, but for weeks after that. This will be a catalyst for gold prices to move up.”
– Says Chirag Mehta, Senior Fund Manager, Alternative Investments
America is all set to vote for its next President in the midst of the COVID-19 Pandemic. We ask our Fund Manager Chirag, how will geopolitical tensions and financial uncertainty affect the yellow metal? Is it the end of the road for Gold or will its risk-reducing, return-enhancing characteristics make Gold an attractive portfolio diversifier? Read on to find out.
1. In wake of the Pandemic, the stock markets have been unstable. What percentage of an investor’s portfolio should be allocated to Gold- given that Gold is a good portfolio diversifier?
Optimism about a quick economic recovery that has driven markets to record highs post March, seems to have waned. There is a good possibility that markets overpriced the rebound in the economy. To add to woes, US coronavirus cases have hit a record daily high and cases are resurging in Europe too, where the UK, Italy, France and Germany have imposed new restrictions and lockdowns.
Financial markets are unlikely to stabilize until a vaccine is developed and there is clarity of when the economy can get back to ‘normal’.
With all the above forces influencing equities, and low interest rates limiting bond markets’ ability to act as a hedge against equity price volatility, gold will prove to be an attractive portfolio diversifier.
We suggest a 10-15% portfolio allocation to gold to capitalize on its risk-reducing, return-enhancing characteristics in these times of crisis and financial repression.
2. What do you think the impact of the US elections will be on the Dollar and Gold prices subsequently?
After repeatedly suggesting that the election be postponed, President Trump has indicated that he might not peacefully transfer power if he loses to Joe Biden. If that happens, it could undermine the quality of political systems and governance in the US, and raise questions about the stability of the US government and the dollar.
The potential for political chaos and uncertainty following the election will be a bigger risk for equity markets than who actually wins the vote. Investors should brace for market turbulence not just till Election Day, but for weeks after that. This will be a catalyst for gold prices to move up.
Irrespective of who wins, the stance of low real rates, further quantitative easing and government stimulus would not change given that the pandemic is still raging and the US economy is in a dire state. This will continue to weigh on the dollar and fuel gold prices for the foreseeable future.
3. How long is the bull rally in Gold expected to continue for?
It’s becoming increasingly clear that normalcy will continue to evade us and the world will be stuck in a cycle of lockdowns and openings till a successful Covid-19 vaccine is developed and distributed and the virus is defeated. Most vaccines, in the final stages of clinical trials, are expected to be publicly available only by mid-2021.
As such, sustained government relief measures and lower interest rates and quantitative easing by central banks are imperative to get the economy through this health cum economic crisis for as long as it takes.
Gold will continue to be a stable form of money with potential to store value in the midst of this global currency debasement and will appreciate in these times of low interest rates. It will thus continue to be a preferred portfolio asset generating good risk adjusted returns for its holders for the foreseeable future.
4. Which is the best way to buy Gold – Gold Saving MFs, ETFs or physical Gold and why?
Purity is always a concern when buying physical gold. In addition, the purchase of gold bars and coins comes at a premium of 5-15% above gold prices on account of wholesale and retail markups and making charges. This amount plus the 3% GST paid at time of purchase remains irrecoverable on sale.
Gold ETFs are listed on the exchanges and invest in physical gold. Each unit of the Quantum Gold ETF represents ½ gram of 24 carat physical gold. Investors in Gold ETFs do not bear any making charges or premium. Also, they don’t have to worry about purity, storage and insurance of gold. Moreover, Gold ETFs are traded on the exchange at the prevailing market price of physical gold, thus investors can buy or sell holdings at close to the market price, without paying a premium on purchase or selling at a discount. Mutual fund investors who prefer the SIP route of investing can invest in the Quantum Gold ETF via the Quantum Gold Savings fund.
5. What is a good yardstick to measure a Gold ETFs performance?
A Gold ETF invests in gold bullion and aims to passively track the domestic physical gold price. The closer the ETF’s performance to gold’s actual performance, the better an ETF is doing its job. This can be measured using the tracking error. Tracking error is the difference in the returns generated by the ETF and its benchmark i.e. gold. The lower the tracking error of the ETF, the closer is its performance to actual gold prices. Low tracking error can thus be a good way to choose a Gold ETF. Tracking error of Quantum Gold ETF since inception stands at only 0.005% and on an annualized basis it stands at 0.086% as of September 2020.
Conclusion
With the recent fall in prices, gold’s risk-reward proposition now looks even more alluring. We suggest that investors may use this correction to build their allocation to this monetary asset. Because the macroeconomic realities facing the world today indicates that gold will remain a preferred strategic asset now and for years to come, powering its price to new highs.
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