Gold has had an extraordinary year in 2020, going up by almost 20% in value terms. The reasons for this stupendous rise can be analysed in the following context :
COVID 19: The Pandemic has unleashed enormous uncertainty with respect to life and businesses globally. It is quite evident that many businesses may not survive the COVID 19 and we will find ourselves in the new world even after this threat has passed. All this leaves people with uncertainty and in uncertain times, GOLD has always been the safe haven for investors as was evident in the financial crisis a decade ago or even after the 9/11 Bombing of twin towers. So Gold as an investment of choice in uncertain times is one main contributor.
US – China : US – China account for up to 40 % of Global trade and both have large US dollar reserves. The ongoing trade war could get worse before getting better and it will impact the US dollar quite adversely. Therefore there is a shift out of US Dollars into GOLD as a hedge against any slide in US Dollars should the trade war intensify esp in the backdrop of accusations that China is the main perpetrator to the COVID 19 pandemic globally.
Local : ( Asia)
India & China are the largest gold consuming markets globally. The two account for a significant chunk of gold used for ornaments and jewelry. However significant quantity of Gold is actually imported, the rise in US dollar vis a vis INR in the past 6 months has also accelerated the gold price rise. Coupled with that is the fact that Investors in Asia also have started diversifying their investments into to gold from other assets like Equity and Real Estate, to ensure that the adverse effects of the pandemic does not impact their investments adversely.
We should expect that the Gold prices to moderate when there is a vaccine in place and the world reboots economic activity which will lead us away from an uncertain future. However should the second/ third wave continue to hinder the global return to normalcy, you should expect the gold to glitter longer.
Our recommendations : Keep a small allocation to Gold in your portfolio going forward. We are sure that we are going to be in a volatile world in the next few years and am sure a small allocation to Gold will be a good hedge should your equity assets take a big beating. Have you send our video on Asset Allocation?
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