Below is the Quote on Gold Monthly by Mr. Chirag Mehta, Sr. Fund Manager-Alternative Investments , Quantum Mutual Fund
Monthly Gold Outlook :
From a worsening pandemic to a sluggish economic recovery, the global macroeconomic picture is still far from clear, and strong investment demand for gold reflects this uncertainty. Expectations of further stimulus, an ultra-low interest rate environment and geo-political tensions are other factors driving investors to seek some stability for their savings through the yellow metal.
Gold prices took a stratospheric leap in July, increasing by 11% in US-dollar terms. Prices ended the month at US$1,974/oz, a level not seen since the 2011 high of US$1,921/oz.
As gold moves from strength to strength, investors are asking a very pertinent question - Is it advisable to invest in gold at current levels? We think it is, and here’s why.
Covid-19 is far from over
The reemergence of infections seen in Japan, Australia, South Korea and Vietnam and upturn in infections seen in USA, Russia and India could trigger the reimplementation of lockdowns and containment measures. The more delayed the complete reversal of the Great Lockdown, the slower the economic recovery. With this background, it is hard to imagine a scenario where central banks around the world will change their accommodative stance any time soon. To add to the soup, the large disconnect between the real economy and liquidity fueled financial markets is increasing the possibility of a market crash. 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 at play, gold is proving to be an attractive portfolio diversifier and an important asset in these uncertain times.
The dollar’s loss is gold's gain
The dollar has been dropping dramatically. The currency lost 4.4% in July and hit a two year low. This dollar weakness is being attributed to a host of factors - United States’ inability to control the virus outbreaks and investor worries over its economic recovery being the major ones. With infections surging, re-openings are getting rolled back, dashing hopes of V-shaped recovery. At least, the US seems to be trailing dramatically as far as its management of Covid is concerned vis-à-vis its counterparts in Europe and therefore will have to do more to support the economy. The US economy contracted by 33% y-o-y in the April-June quarter. U.S. consumer confidence too plunged to 92.6 in July from 98.3 in the previous month amid a spike in infections. Investors are thus questioning the traditional view that U.S. economic growth and investment returns from the dollar would be higher than other countries going forward. Adding to investor concerns, the U.S. government is struggling to finalize the next round of stimulus, without which the economy could worsen further in the months ahead.
With this background, investors were looking to the Federal Reserve to reiterate that it will do whatever it takes to support growth, and it did just that. The dollar has been tumbling on expectations that the central bank will continue its accommodative policy for years to come and on speculation that the central bank will have a higher tolerance for inflation going ahead. An inflationary bias would translate into lower/negative real yields and sink the currency further as more stimulus measures are announced. In addition, record high debt levels by the United States government which are set to reach 120% of GDP by the end of 2020 are threatening the dollar’s reign as a reserve currency.
Gold being a relatively risk-free asset and the currency of last resort, will benefit from a protracted economic deceleration in the US, sharp increase in inflation, debasing of the dollar and low/negative real US interest rates. If the U.S were to adopt negative nominal rates as they implement the Modern Monetary Theory, this could just accelerate the decline in dollar’s value. Gold which usually moves in an opposite direction to the dollar because of these characteristics, will continue to benefit with a fall in the value of the dollar, as it is currently
Additionally, the EU’s unprecedented move to issue common debt on behalf of all its members – something that was opposed in the past – is a move showing the bloc’s solidarity and could increase the faith in the euro, weakening the position of the U.S. dollar as the only “global currency”. This too should support gold.
Another factor that weighed on the greenback were heightened tensions between the United States and China which intensified in the month after tit for tat embassy closures. Both superpowers are at odds on almost every front. As the relationship between the two further deteriorates, the risk of a military confrontation is growing, which could push both countries closer towards war. Such fears again hurt the dollar and were bullish for the yellow metal.
Gold is a still under-owned
Even though Gold ETFs have received record inflows in 2020, greater than any previous full year, gold remains an under owned asset. Market share of Gold ETFs compared to all ETF assets jumped from 3% to 8% in the aftermath of the Global Financial Crisis before dwindling to 1% levels in the following years. The current figure stands at 3% indicating significant potential for Gold ETF asset expansion going forward.
Another indicator of under-ownership of the metal is that global allocation to gold stands at only 2.5%, a figure far-flung from the ideal allocation of 10-15%. This means that even a small uptick in portfolio allocation to the asset class could translate into significant price appreciation for gold in the time to come.
60-40 asset allocations are not dependable anymore
In the pre-pandemic world, bonds may have zigged when equities zagged. But this might not be true in the future, making it imperative to revisit a longstanding investment tenet: the use of bonds as a diversification tool against equities.
Central banks continued to remain accommodative for six years following the Global financial crisis of 2008 and this is many times more severe than that. This tells us that monetary and fiscal policies around the world will continue to be accommodative to boost GDP growth for the next few years.
Already, as per the IMF, global public debt is expected to exceed 100% of GDP in 2020–21, up from 80% last year. And the average fiscal deficit is expected to touch 14% of GDP in 2020, up from 4% last year. This is an unprecedented rise, and there is more coming. Low debt servicing costs are the only way to manage these debt levels that have grown too large to be managed.
Thus, bond yields and short-term interest rates are bound to stay low for the foreseeable future. In addition, the potential for bond price appreciation isn’t much considering that rates are at all-time lows already. Both these things are expected to reduce bond returns and increase gold’s portfolio utility.
Gold is indeed trading in uncharted territory. But given that the long-term outlook is supportive for the metal with governments struggling with rising deficits and unsustainable debts, make a strategic allocation to gold because it's the counterweight to paper money which is continuing to lose credibility as a store of value. Any temporary pullbacks will be a good buying opportunity to build up your 10-15% allocation.
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