Gold once again has emerged as one of the best performing asset class in 2020 after stupendous 2019. Gold prices got shot in the arm after the US Federal Reserve chief warned that a full recovery of the US economy could drag through 2021. The increasing tension between the US and China have light the fuel for gold. Last week, gold was going nowhere as spot prices were trading in a narrow range of $1690-$1710.
The fundamental story for gold remains strong as money printing by central banks and vast state stimulus packages are rekindling interest in one of the oldest stores of wealth a.k.a gold. The same story was unfolding in 2008 when money managers piled in gold as an increase in money supply leads to a devaluation of fiat currency and an increase in inflation. But in 2008, inflation was kept checked which is why gold had to scale back from high’s of $1970 but the unprecedented scale of the government response to the coronavirus crisis is feeding the argument that this time it will be different. In an environment where bond yields are close to zero, real interest rates are consistently under zero, there is no opportunity cost of holding gold. Historically, that is when gold has performed the best.
Silver meanwhile has finally shown some signs of life after lagging gold for several months. Silver is belatedly catching up gold and broke out $16 level. Silver future has broken out from a 4-month downtrend line and the next resistance is $17.60-$17.80. Silver’s recent breakout is also good news for gold as we have historically seen that silver’s participation is necessary for gold’s rally otherwise gold’s rally is short term and fizzles out. So Gold needs its sister metal strength to rally further.
Outlook for both precious metals remains bullish with gold prices expected to trade around Rs 50000 in next quarter while for silver, we anticipate prices around Rs 54000. Silver has started to outperform as we can see from the gold/silver ratio which in a matter of days has come down from 108 to 100 and if the momentum continues then we can see levels before pre-crisis i.e. at 88. In the short term, both gold and silver are in the overbought zone so we would recommend investors to wait for some dip before buying.
I remain bullish on Gold and Silver over the longer term as concerns of sustained global economic growth continue to linger. There are various avenues for investment in gold like Gold ETFs, Sovereign Gold Bonds, and Digital Gold. For investors looking to invest in SIP way, they could opt for investing in Gold ETFs or through digital gold with small denominations. The only drawback in Gold ETFs is management fees and if an investor is looking for investing long term, Sovereign Gold Bonds are a good alternative. At any point in time, investors should have 10% of gold in their overall portfolio. With the rapid depreciation of our currency against the US dollar, gold remains a reliable hedge against inflation and store of value.