Gold symbolizes wealth that appreciates over time, never diminishes, and provides financial security during difficult times. In our country, people buy gold whatever the celebration is, and wonderfully there is one festive occasion in the Hindu calendar ‘Akshaya Tritiya’ when buying gold is considered auspicious.
From the ancient times to the modern age, from the old school of thoughts to the new philosophies, there has been a paradigm shift in the investment concepts but the precious metal has stood the test of times. Gold is an enduring investment that could be truly synonymous with the word ‘Akshaya’ and hence is accorded all the importance on this day.
A host of factors-a breakthrough in COVID-19 vaccines, rapid global economic recovery, an improving set of economic data points, a sharp advance in the risk assets, a rebound in the dollar index and, US bond yields prompted a 22 percent descent in gold from its record highs marked in August 2020.
The yellow metal may have lost some of its sheen momentarily, but is yet again gaining traction and has recovered by almost 10 percent from its recent lows. At the same time, we have an occasion along with plentiful supportive aspects that justify our allegiance towards gold and support the very fact that gold should form an integral part of the portfolio in the current scenario.
The broader theme suggests that the interest rate environment is likely to remain supportive as indicated by the US Federal Reserve officials. Another key reason is inflationary pressures that are gradually building up amid the continuance of easy money policy. A multitude of commodities from crude oil to metals and even soft commodities are surging higher, indicating budding inflationary trends that are likely to continue for a prolonged period.
The latest data from the US where consumer prices have risen at their fastest pace in nearly twelve years in April further validates the case. An uptick in inflation which is outpacing the interest rates would suppress the real interest rates and act as a strong tailwind for gold, upholding its bullish narrative.
Going forward, there is certainly a downside risk to gold as rising inflation might put pressure on the Fed to contemplate raising rates sooner than expected to avoid overheating the economy. However, the Fed has assured that they would like to see stable growth, as well as higher inflation and employment numbers before making any such move. They are still holding firm on their view that any rise in price pressures is probably going to be transitory.
Furthermore, the dollar is sinking amid the ultra-easy monetary policy, along with large stimulus packages being doled out by the US government. Additionally, the investment demand is expected to witness a spurt after the hefty outflows seen from the gold ETFs in the first quarter of 2021, as price corrections would entice buying interest yet again.
On the valuations front, gold is relatively better placed and could witness renewed consideration from the investors’ fraternity as global equities look quite overvalued. Last but not the least, the pandemic is far from over and gold may be a saviour in such uncertain times. Vaccination drive is being effectively administered in the developed nations but the new strains of the virus are of great concern and pose a risk to an already fragile global recovery path.
Given the scenario, investors would like to create a balance between the ‘risk-on’ and ‘risk-off’ environment and gold would be the preferred choice in times of volatility. Bearing in mind the prevailing backdrop, one should allocate 15-20 percent of the total portfolio in gold as it bears a negative to low correlation with other assets. Empirical data suggests that any portfolio which comprises gold provides better risk-adjusted returns, especially in times of crisis.