debt markets | Investors add a lot more of gold to portfolios amid uncertainty

A global pandemic, high US debt, dollar weakness and heightened geopolitical uncertainty have led to investors accumulating gold and it being a preferred asset class.

Data from RBI and AMFI shows that investors have bought gold worth Rs 10,130 crore in the first six series of sovereign gold bonds in this financial year and Rs 3,900 crore into gold ETFs totally to Rs 14,000 crore. As against this, they bought ETFs worth Rs 75 crore and Rs 5741 crore of Sovereign gold bonds in the same time in the previous year. Though gold prices have corrected from their peak in August, over the last one year it has risen by 31%.

Wealth managers believe investors are adding gold to their portfolios as they believe it could be one of the best performing asset class, given the uncertainty surrounding equities and low rates in fixed income products. Investors have been adding gold to their portfolios as they believe it will head higher.

“Gold prices would continue to climb up amidst the heightened liquidity, possible raise of inflation due to that and bloating fiscal deficits of governments putting additional stress on their currencies including US dollar,” says Navneet Damani, Vice President, Motilal Oswal Financial Services. He has a target of $2450 on gold by the end of 2021 and in rupee terms between Rs 65000 to Rs 68000 per 10 grams.

With Covid -19 pandemic likely to cause huge economic loss across the globe. Even though unlock has started, there is uncertainty on the exact damage caused due to the lockdown and when corporate earnings will bounce back . Valuations are high with the Nifty trading at a PE of 33, higher than its historical average. In fixed income banks have cut deposit rates and investors are left with a maximum of 5.4% on a State bank of India fixed deposit. Many analysts believe gold is headed higher.

“Massive and unserviceable mountains of government debt are piling up throughout the developed world in a bid to stimulate pandemic-hit economies. This is making central banks around the world print unprecedented numbers of dollars and other currency in order to finance the government’s bills. With a worsening pandemic and sluggish economic recovery, it is hard to imagine a scenario where governments and central banks around the world will change this accommodative stance any time soon,” says Chirag Mehta, Fund Manager, Quantum Mutual Fund. Mehta believes gold, will increasingly become the preferred choice for investors and savers seeking wealth preservation. This is turn could attract more money to gold.

( Originally published on Sep 10, 2020 )

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