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If you ask traders and investors what they hate most, most likely they would say, uncertainty. Volatility takes centre stage, when the outlook becomes hazy. Investors and traders alike run for cover, causing the demand for safe haven assets to increase. We are currently in a period where the gold prices have shown ferocious moves compared to equities. Investors and traders need to be calculative while making investment decisions at this time.
Gold had given 16% return in year-to-date 19 July 2024, compared to the 14% return given by the Nifty 50 index – the most widely tracked gauge of stock market performance. However, Union Finance Minister Nirmala Sitharaman announced a sharp cut in import duties to 6% from 15% earlier on gold, in Union Budget 2024. This pulled down the price of yellow metal. Compared to Rs 72,718 per 10 gram on MCX on 22 July 2024 the gold prices went down to Rs 68,510 by end of 23 July 2024 – the day of budget announcements, and then went to hit a low of Rs 67,462. Equities on the other hand tanked for a while due to increase in taxation of capital gains, but quickly recovered to go higher. These price gyrations baffled many investors. A look at the drivers of price change however should help to take a more informed decision.
The surge in gold prices is an outcome of increased safe haven demand on the backdrop of geo-political tensions. Market participants are anticipating a cut in interest rates by the US Federal Reserve. Lower interest rates are favourable for gold prices. Another key reason for the surge in gold prices is sustained buying by central banks looking to diversify away from the US Dollar. After buying 1037 tonnes of gold in CY2023, central banks have continued their buying trend in CY2024, with net purchases of 290 tonnes in the first quarter.
Going forward, gold should remain in demand in the near term for multiple reasons. The Chinese economy is expected to improve gradually, leading to increased demand for gold from Chinese consumers. China and India are the biggest consumer markets for gold. Reduction in gold prices and unavailability of new issuance of sovereign gold bonds together should enhance demand for physical gold or physical gold-backed investments. Uncertainty surrounding the US Presidential election may further support gold prices. Worries about rising stock markets may also prompt investors to allocate some money to gold.
Though gold prices are expected to remain strong in the near future, investors should never chase gold for returns. Gold does not generate any income. Instead, gold acts as portfolio insurance in uncertain times, especially when financial markets tank. Therefore, gold should be included in most portfolios using exchange traded funds (ETF). Units of gold ETF tend to be liquid on the stock exchange. Though listed sovereign gold bonds offer tax-efficient exposure to gold over the long term, they may not be as liquid as gold ETFs. A 10% allocation to gold- the ultimate currency, can come in handy in uncertain times. Investments in gold ETFs are tax -efficient post the budget announcement that capital gains on these will be taxed at 12.5%, and not at marginal rate of tax.
The core portfolio of a long-term investor should be tilted towards equities, especially high-quality stocks. While valuations may seem, a bit stretched in some stocks in smallcap segment, overall Indian equities appear to be fairly valued. The International Monetary Fund recently upgraded its growth estimates for the Indian economy to 7% from 6.8% earlier. Sectors focused on manufacturing should do well as the Indian government continues to offer policy support. Policies such as production linked incentives and global trends such as China plus one doctrine should work in favour of Indian manufacturing sector. Additionally, blue-economy as well as traditional sectors such as housing and textiles may see some policy support going forward. These sectors may get rejuvenated and reward patient investors.
After the announcement of budget and third quarter results, some market segments may experience investors booking profits; a common occurrence known as ‘sell on news’. These corrections can present favourable entry points for medium to long term investors. Foreign Portfolio Investors (FPI) may take this opportunity to allocate more money to Indian equities. Over the next 6-12 months, a potential advantage could come from a weaking dollar. If the dollar index (DXY) – a popular gauge of the strength of US Dollar against six major currencies, starts trending down, then it could accelerate money flows into emerging markets including India. Most analysts are currently not factoring in this aspect. If it materialises, then we may see further boost to the Indian stock market rally.
So, to summarise, do not chase gold just because it is going up. Equities still are attractive, and corrections are a good time to buy equities, while you continue to allocate some money to the yellow metal.
Article is published in Economic Times - Click here
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