Gold nearing all-time highs!

Last updated: 06 Jul, 2020 | 05:27 pm

Gold nearing all-time highs!

Even as gold nears its all-time highs, the fundamentals for gold are getting stronger every day.

To understand why the environment is so bullish for the precious metal, it is important to understand why gold is increasingly becoming a more attractive safe haven for money.

Global 'Debasement' of currency

  • As a result of the shutdowns and economic impact of COVID, the prime motive for developed and developing countries is to keep their economies growing. This is becoming increasingly challenging given wide scale shut down that is affecting companies and industries.
  • Unemployment across the world has spiked, and the next year will see a wave of small and medium scale businesses shutting down.
  • In order to keep money supply in the economy, Central banks have had various levels of stimulus to increase availability of money supply. 
  • The downside is that this money supply in the economy by printing money adds risk to the country's finances and currency. More money supply within the economy reduces the implied value of the currency.
  • The USA has already offered a stimulus package of over $3 trillion in the last 3 months with more to follow. As a comparison, during the global financial crisis of 07-08, this quantum of $3 tn was added over a period of 7 years. 

This devaluing of currency globally has given rise to a situation where the world is running out of safe havens for money.

What are central banks doing?

  • Central banks, who control money supply in the economy by adjusting interest rates, across the world have cut rates to historic lows. 
  • This increases money supply in the system which will lead to inflation of prices of goods and services, an indication of a growing economy.
  • However, yields on treasuries and government bonds have fallen. This perceived safe haven for money now yields very little on investment. In fact the US Federal reserve has already pledged to keep rates low through 2022.

And how does this benefit gold?

  • Gold is an asset uncorrelated with other investments (Stocks, bonds, real estate). It is a precious metal that exists in finite supply, but has strong demand the world over. Historically it was the basis for assigning value to global currencies.
  • It is an asset that is considered a safe haven in a situation where currencies are being devalued, as well as a good hedge against inflation. (Inflation in prices lifts the value of assets)
  • Moreover, the world is currently contending with unprecedented shutdowns, drop in productivity and an increasing move towards de-globalization of trade. These are conditions ripe for inflation over the medium term.
  • Global central banks have also been buying gold in order to diversify away currency risk and hedge against inflation.

IND Analysis

  • While central banks are infusing money supply into the economy, sending markets and asset prices up, all this makes for an increasingly fragile currency and global economy.
  • Gold, is a great uncorrelated asset that forms a hedge against inflation and a safe haven during potential turbulence in the economy
  • In the current scenario, Gold should find allocation in your overall investment portfolio (depending on risk profiling and goals)
  • Investing in Gold can be done both physically as well as digitally. The Sovereign gold bond scheme is another great way to take a position in the asset class.
  • The next tranche of Sovereign Gold Bond will be open for subscription from Monday, 6th July 2020. We will soon be sharing an update about the salient features and benefits of investing in SGBs, and how you can invest in the same through your personal family wealth office.

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