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Is it safe to make investments in gold at this point?

Gold performed extremely well in 2000 during the dotcom bubble, and in 2008 during the global financial crisis. Will it repeat the performance?

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Last Updated: May 21, 2020, 04.45 PM IST
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By Dr Neelam Rani & Ankit Sharma

Investors around the world are shifting their investments in risky asset classes such as stocks to risk-free assets such as government bonds, gold, and so on, due to the uncertainties in the global economics caused by the Covid-19 pandemic. Traditionally, people invest in physical gold in India.

However, when gold is trading in the range of 43000-47000 per 10 grams, the question in everyone's mind is does it make sense to invest in the yellow metal now since it has already rallied around 16% in the calendar year. Is it safe to invest in the precious metal now? What is the fair price and expected target for buying gold? What is the right way to invest under the current situation?

To answer all these questions and more, the investors can consider the following factors:

Should you invest in gold?
If you are a long-term investor and want to accumulate wealth for the long term, the current price or a small up or down price movement should not affect your decision. As per the research of Oxford Economics, gold should do well in the period of deflation. Deflation is the period where interest rates are low, consumption going down, and there is a financial stress in the economy.

We have also seen that gold performed extremely well in 2000 during the dotcom bubble, and in 2008 during the global financial crisis. The current situation due to Covid-19 is much bleaker than previous global financial crises. The steep fall in Dalal Street has spared no one. No Portfolio is immune to the coronavirus-induced bloodbath on Dalal Street, aggravated by the sharp fall in crude oil price. We have also seen the negative pricing of crude oil, which has never happened in history.

We also know that gold is negatively correlated with equities. We have seen global Rating agencies and the International Monetary fund (IMF) cutting global GDP. It will Impact the equities negatively and to hedge their portfolio institutional investors would shift their investments from equities to gold and bonds. But the recent spike in yield in bonds due to the liquidity issue in the bond market would nudge investors towards gold.

Simply put, these factors point towards an increase in demand for gold in the coming days.

Will it shine more?
Gold has given an average return of 14.10% annually since 1973 in rupee terms, as per the World Gold Council Report issued on 24th March, 2020 India edition. Further, we have also seen that Rupee is depreciating continuously and hit a lifetime high of Rs 77 on 21st April,2020 which is also a positive for gold price. Economists are also expecting that the price will depreciate more in the coming days due to Impact of the Covid-19 pandemic on the government fiscal deficit target.

We have also noticed that a lot of World Gold Mines temporarily shut their business due to the pandemic which will also have a positive impact on gold prices - low supply and high demand. In the calendar year ending December 2019, gold has given a return of 25% when there was no threat of the pandemic. In the current year, gold has already given a return of 16% so far and now Covid-19 is spreading very fast which may put pressure on equity in the coming days and this will further drive the gold prices up. In short, the prices are likely to move upward in the coming days.

The right way to invest
The best way to Invest in gold in the current situation is to opt for a gold-backed ETF or Gold Sovereign Bonds of the Government of India. Under Gold Sovereign Bonds, investors will get regular income in the form of interest apart from the value appreciation in the price of bond. Further, the capital gains on sale of Gold Sovereign Bond held till maturity is also exempt from income tax. If these are sold before maturity, then capital gain is taxable with Indexation benefit.

Due to the increase in gold prices, we may face some liquidity issues in the physical gold market due to lower demand, so Investment through ETF and Sovereign Bonds is a good option. These are tradeable at the stock exchange, so there may not be any liquidity issue. Further there is no TCS or other taxes on purchasing of bonds, which we need to be paid at the time of purchasing physical Gold. So, for the investment purpose, ETFs and Sovereign gold bonds make better sense.

Dr. Neelam Rani is Associate Professor in Finance, Indian Institute of Management Shillong.
Ankit Sharma is a Chartered Accountant.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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