Gold Glitters Again; Conventional Wisdom Returns To Investors

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Gold Glitters Again; Conventional Wisdom Returns To Investors
Prakash Chawla - 24 June 2019

Interest rates are falling worldwide, slipping even negative, on the back of low bond yields and dropping inflation. The stock market is in a state of turmoil, leaving even the wisest of investors confused. No wonder, gold has started glittering again. In the Indian market, it has breached Rs 34,000 per ten grams, moving sharply up from the band of Rs 31,000- 32,000 just about a few weeks ago .

Those tracking the precious metal attribute its smart rise to increased uncertainty in the state of global economy marked by heightened trade tensions which are spreading well beyond the US and China and spiralling into services. With most of the central banks, led by the US Federal Reserve, continuing with the accommodating interest rates and the prospects of dollar weakening, investors are rushing to gold as a ''safe haven''.

The ''safe haven'' refuge is not only being sought by individual investors but also central banks across different economies, including India, China and several European countries.

''Diversification remains the key motivation for central banks to buy gold, as ongoing geopolitical and economic uncertainty continue to cast a shadow over the future, '' says Krishan Gopaul of the Market Intelligence Group of the World Gold Council in his Goldhub blog.

All those who describe gold as a kind of ''dead" and "passive'' investment, luring investors to high risk stock market, must also then question the wisdom of the central banks. In fact, central banks across the world, are not behaving in much of a different way than the conventional Indian wisdom which always favoured some tidy portion of individual investment into gold.

Whether it is the threat of global slowdown or continuous face-off between the US and Iran, why is it that gold becomes a '' safe haven''? The answer lies in low or rather no risk with it while the equity market is a high risk bet . Even the debt markets, considered relatively safe , have turned into a perilous option within India with some of the well-known names finding themselves into the whirlpool created by the likes of DHFL, Reliance Capital and several other NBFCs which are confronted with an unprecedented investor distrust. So, whether it is the international financial markets marked by talk of a possible recession amidst increased trade war and protectionism or the domestic economy which finds itself into the spiral of debt defaults ,low corporate earnings, shake out in the industry and falling interest rates, investors are left with not many options than rushing to good old gold.

The mood change is palpable. Investors back home are no more impressed with headline data of Nifty 50 trading in the near about zone of 12,000 or the Sensex about 38,000-39,000, they have seen tremendous wealth erosion in stocks like Yes Bank, Jet Airlines , PC Jewellers, or even some of the front line stocks which had become darlings of the investors - HEG, Graphite India, Page Industries, Bharat Forge, Motherson Sumi. In fact,the entire automobile pack has suffered a severe jolt while very little confidence is visible in metals, real estate, pharmaceutical. Mutual funds may be attracting Rs 8,000 crore in the Systematic Investment Plans, but the net inflows are just about Rs 4,000 on a monthly chart.

Gold, on the other hand, look quite safe and promising. Analysts are betting even on Rs 36,000 -37,000 per ten grams by Diwali with most of the demand coming from investors and not in the jewellery segment. The exchange-trade gold funds or some of the gold schemes which have so far remained lacklustre may be visible again. If not very high returns, the gold options provide a safety with low or no downside, unlike the roller coaster ride of the financial markets where the fall below has been sending scare down the spines of even the smartest of riders.

The best course, would be to return to your grand parents' advice and buy some gold bars on proper receipts and not jewellery. Or wait for some fresh gold funds which may be launched by banks or mutual funds. Play safe; Investing is not like playing the slog overs in the ICC World Cup.

The author is a New Delhi based journalist.

India’s 2018 gold demand dipped 1%; 2019 expected between 750-850 tonnes: World Gold Council
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