Gold
is the world’s oldest currency. It is generally seen as an inflationary hedge.
But as the world was in the grips of low inflation, gold was getting ignored.
Only in times of economic uncertainty or high inflation does gold attracts
world’s attention. But this year finally gold is being perceived as a tool to
combat inflationary pressure. Inflation has started to pick up in Europe.
Recently, US employment rose the fastest since 2009 fuelling fears of a rise in
inflationary pressure. US economy is at or near full employment. More and more
dollars coming into the spending stream will primarily pump up prices, raising
levels of inflation up.
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| Share Market Tips |
We
are bullish on gold this year. The reason: Compared to stocks, gold is looking
like a bargain. Gold to S&P 500 ratio (the number tells you how many ounces
of gold it would take to buy the S&P 500 in any given month) is at its
lowest point in 10 years. For mean reversion to occur; either the gold price
needs to appreciate or share prices need to fall.
Any
decline in demand for physical gold from India is compensated by increasing
demand from China. Last year because of implementation of GST, India saw a
decline in demand for precious metals. According to World Gold Council, China
remained the world's largest consumer of gold bars and coins in 2017, investing
in 306.4 metric tons, on the back of strong domestic demand and a rise in young
consumers. This trend is expected to continue. China is also world’s largest
producer of gold. Global gold mine production finished 2017 fractionally higher
than the previous year. However, due to environment concerns in China, output
has declined by 9 percent so we expect some tightness in the physical market
this year.
Gold
right now is not in the limelight because equity markets are soaring. The
returns in equity market certainly look attractive but we shouldn’t forget that
gold also gave more than 13 percent return last year. In last 15 years, gold
has generated an annualized return of 13.66 percent. A quick glance at the
chart shows how from year 2000, gold has outperformed S&P 500 by decent
margin.
Back
home, Nifty50 did manage to outperform gold in last 10 years but the margin was
comparatively less. We believe gold will outpace Nifty50 this year.
There
is no denying that equity markets are trading at peak (above 25 PE). However
this does not mean that equity markets will not perform but looking at the
fundamental facts, we do foresee gold still shining. We advocate any investors
that investment planning should include all asset class, not just one
particular class. Portfolio should be diversified and every investor should
have at least 10 percent holding in form of gold in their portfolio. History
has shown, gold is wealth creator and whatever economic conditions worsen,
there will always be demand for gold. We believe investors should invest in
gold.
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