Gold is a good hedge against equities and is often used as an insurance to equity holdings. In past, even in extremely negative scenarios, gold has performed well. It is therefore advised that one should always hold some gold in his/her portfolio.
Gold is a very popular metal; mostly it is accumulated in the form of Jewellery. However, this is not an ideal mode for an investment considering the transaction costs. A retail investor should consider investing in Gold via virtual ways i.e. Exchange Traded Funds and Mutual Funds that invest into gold mining companies through an overseas fund. One should bear in mind that Gold Mining Funds can be volatile due to exchange rate risk. Therefore it is suggested that they invest in the companies which deal in Gold rather than directly investing in the base metal; Companies are subject to market risk that is much larger than that of a commodity like gold.
Gold Prices peaked in 1980 and it took 26 years to reach back the same price after bottoming out to almost 30 % of the peak price in 1998. will it not be risky to invest in a asset class which has such long turn around cycles.
ReplyDeleteIt is important to look at the fundamental factors while investing in gold. Gold spiked up in 1980 to reach a high due to High inflation because of strong oil prices, Soviet intervention in Afghanistan and the impact of the Iranian revolution, which prompted investors to move into the metal. The fall from this peak was triggered by central banks reducing gold bullion reserves while, at the same time mining companies were selling gold in forward markets to protect against falling prices. The recent rally was due to a combination of factors - central banks stopped reducing gold reserves, mining companies unwound their forward contracts, increase in government deficits and risk aversion. There have been no significant finds and gold demand also was increasing.
ReplyDeleteWe believe that with significant government deficits and government interventions/funding are fundamental factors that would lead to further devaluation of currencies and consequently will lead to continued strength of gold. We also believe that there could be a significant unwinding of US Treasuries due to fundamental factors. (low interest rates along with continued devaluation in $) As US treasuries become unattractive, a part of these proceeds are likely to move into gold which we believe can lead to continued upside in gold.
This brings us to the point – does gold have a 26 year cycle ? I don’t believe so. We would need to see a few cycles of similar timeframes to come to this conclusion. At this point I don’t think we have such data to support this. Hence, I would go by fundamental factors while determining the broad direction.
At the same time I believe that we need to be prepared in case there is a change in trend. For this I would look to technical analysis. The first warning signal would come in case gold prices fall below the 100 day moving average. Today that is far away at $976.
In summary – we are very bullish based on fundamental factors. We believe gold could have a very significant rally. This could even be as large as the rally we saw in oil. That view holds till gold breaches the 100 day moving average.