Going for the gold

As the year is set to end with some robust gains, it may be a good time to buy gold, analysts recommend.

The spot price of gold in Mumbai traded at Rs 39,315 per 10 gram for 24K gold on Wednesday, compared to Rs 31,750 recorded on December 31, 2018 — a rise of nearly 24 per cent. A weak US dollar and a host of other factors worked out in favour of gold prices. Spot gold has generated a stellar 17 per cent profit in 2019 to date.

Similarly, after six years of dismal returns, gold mutual fund schemes in India staged a solid comeback in 2019. Of the 351 equity funds in the Rs 26 trillion Indian mutual fund industry, the two top-performing equity funds were gold schemes.

Analysts say the present market environment is perfect for gold investments. Central banks around the world have been cutting interest rates. The European Central Bank has rates at zero per cent, the Bank of Japan has negative interest rates and the Swiss National Bank has the lowest negative rate. The environment of low yields from currencies and nervousness about equities and bonds offering smaller and smaller yields has boosted the prospects of gold to shine again.

Central bankers across the world have kept buying gold throughout the year, underlining the possibility of tough times in the near future. In the first three quarters, the central banks bought 547 tonnes of gold, which is 12 per cent more compared to the previous year.

In fact, gold has witnessed a bull-run since the start of the year. The bull-run was triggered by President Trump's action of starting a US-China trade war at the end of 2018. Currently, efforts are underway to resolve the fight, but if tensions continue on this front, the resultant uncertainty is expected to further encourage gold purchase, which means upside potential for the metal.

If the US-China trade war talks collapse and President Trump imposes more tariffs on China, analysts are expecting strong gold buying in the days to come. If, however, the US-China trade war situation calms down and a deal gets signed then there could be more selling and that could mean pressure on the prices.

Another factor in favour of the yellow metal at this juncture is the seasonal behaviour. Gold has one of the strongest seasonal patterns of any assets for the months of January and February. Part of the reason for gold strength during this time of the year is that gold purchases are made ahead of the Lunar New Year. In the last 10 years, gold has climbed an average of 3.4 per cent in January, rising during this month for the last seven years in a row. February has a 10-year average increase of 1.64 per cent.

According to the World Gold Council, gold as an investment has performed broadly in line with the S&P 500 over the long term, delivering average annual returns of 10.4 per cent since the elimination of the gold standard in 1971. But, when compared to commodities, gold has outperformed not only broad-based indices but sub-indices and most individual commodities too.

All sub-indices, including precious metals, have fallen over the past five years. But gold has risen during that time. Gold has also outperformed major commodity sub-indices over the past 10 and 20 years and outperformed most individual commodities, many of which have delivered negative returns in recent decades.

Commodities are often used for diversification during periods of high inflation. While it is true that commodities have performed well during inflationary periods, gold has performed better. And, in periods of low inflation, commodities delivered negative nominal returns, while gold posted positive returns, reflecting increased demand when economic conditions are robust.

This behaviour is considered particularly relevant today. With current inflation expectations being low, there is a strong case for gold to outperform other commodities. So, all factors considered, analysts favour a good time in the short term for the precious metal.

Views expressed are strictly personal