The world is currently standing between a rock and a hard place as it deals with emerging unknowns and challenging knowns coming from all directions. Asset classes across the globe, be it equities, fixed income, commodities and even gold, are witnessing downward pressure on prices as investors try to figure out the best ways to grapple with the current situation. According to reports, coronavirus has infected more than 2,75,000 people and killed more than 11,000 across the world. On the other hand, ~92000 people have recovered. India has reported 5 deaths and has crossed the 250 cases mark.
In an attempt to mitigate the impact of the coronavirus on economic activity and maintain financial stability, central banks across the globes announced coordinated rate cuts and measures to infuse liquidity into the system. In such an environment where volatility is confounding even the most seasoned investors’ and central banks are making a coordinated effort to infuse liquidity to stave off recession, the shine of gold is likely to catch the fancy of many an investor. However, would it be wise to buy gold in the current market scenario and especially after the spectacular run the commodity has witnessed over the last one year?
The main reason why people buy gold is to preserve their money and protect themselves from inflation during an economic crisis. As per research from various institutes, gold is considered to be the best insurance against a potential stock market crash and a recessionary environment. Since nearly 643 BC, gold has been used as a form of currency – convincing people that it will hold value better than paper currency. Having said that, it is also important to remember that gold has not been used as money since the world got off the gold standard in 1973. Additionally, because supply takes time to match demand, the prices of gold can stay elevated for extended periods of time.
In the last year, gold prices have risen by more than 25 per cent, recently touching a seven-year high. Considering this, prices are likely to remain range-bound over the next months unless risk aversion increases further driving prices up. While it would make sense to allocate a small proportionof the portfolio to gold assets one must not shore up too much of the metal. Over the long-term, a disciplined allocation to equities can help investors create wealth and meet their financial goals.