All that glitters: The history and value of gold

Gold has emerged as one of the best performing asset class in 2020, gaining 15% year to date with prices hitting all time high in India. These gains are special as it has come after a
stupendous 2019 where gold rose nearly 25% on US-China trade war and accommodative monitory stance from US Fed.

The buying spree has continued in 2020 as well on increasing fears of recession due to corona virus pandemic. Important question to ask now is - what next for Gold? Should investors look at investing in Gold at this point in time and at these prices? Let’s dig in.

Gold is not a productive asset. Its value depends only on possibility of future appreciation in its price. It is revered as a permanent store of value. In a world where trillion of dollars of paper currencies are created at the drop of a hat – gold maintains its relative value without depreciating. Gold has been the most coveted precious metal since the time of the
Pharaohs.

By nature, when mixed with other elements, it remains stable. In fact, gold remains untarnished when mixed with almost all other liquids and gases known to man. Unlike other
commodities such as metals or crude oil, gold is not completely consumed.

Many empires and Kingdoms were built and destroyed over gold. Once gold is out from the mine, it stays in the world in the form of jewellery, coins, bars etc. forever. Hence, like other commodities, the supply-demand equation does not work that well in case of gold prices.

Earlier, Gold was universally accepted as a form of currency as societies developed. Hence, the history gave power to Gold as most valuable commodity. The introduction of Gold Standard gave the way to physical supply of gold into the monetary system which ended in 1970. Gold prices have increased by an average of 10% per year since 1971 when gold began to be freely traded following the collapse of Bretton Woods Gold Standards.

From investment perspective, Gold has always remained a shelter to investors in times of uncertainty. Gold is especially sought after in times of economic recession and depressions.

Central banks started owning gold as a hedge to manage their forex reserves. In India, gold has special cultural value rather than just an investment avenue and is also treated as one of the reliable means to pass on and preserve wealth from one generation to the next.

Gold has outperformed other asset classes in turbulent times be it economic recession or major currency devaluation phases. Take the example of the 2008 financial crisis - where Gold gave return of 6% while Indian equity markets fell by nearly 60% in that time period. In 2019, with volatile Yuan and dollar index during US -China trade war, Gold again outperformed Indian equity indices by rallying 25%.

The coronavirus crisis and resultant economic uncertainties, fears of economic recession led to scramble for gold. The global gold ETFs witnessed heavy inflows. The Bloomberg Total Known Gold Holdings have risen to all-time highs to 3028 tonnes as of now. The speculative net long positions have reached to the record on expectations that central banks around the world will take more stimulus measures to support economic recovery.

The sharp fall in US equity indices and bond yields at all time lows has raised the chances of negative interest rates in US which may support gold prices at these elevated levels.

We remain bullish on Gold over the longer term as concerns of sustained global economic growth continue to linger. Investors can look for the investment avenues like Gold ETFs, Digital Gold, and Sovereign Gold Bonds on a correction in prices. We recommend investors to have an overall exposure to the extent of 7% of the total portfolio value to Gold at this point in time.

Look to increase the exposure if economic situation deteriorate further on wake of economic uncertainties induced by corona virus pandemic. In case you are underinvested in Gold, look at staggered buying thorough a systematic investment plan in Gold ETFs to benefit out of rupee cost averaging.

Do recognise that Gold will not provide linear, regular returns year after year like fixed income instruments but its returns will remain lumpy. There will be few quarters of lull followed by a sharp spurt in prices. For Indian holders, depreciation of currency against US dollar will also aid overall returns. Gold will continue to hog limelight and remain a reliable hedge against inflation and store of value against ever depreciating paper currencies.

(The writer is Head Advisory, HDFC Securities)