Gold prices in the spot market on the Multi Commodity Exchange of India Ltd (MCX) surged to ₹50,700 per 10 gram on Thursday. Year to date, the prices are higher by 30%.
Gold prices topped $1,900 an ounce for the first time since 2011 and edged closer to an all-time high in the international markets due to the low interest rate around the world and mass spread Covid19. The big question: Will the rally in gold continue and for how long?
Gold benefits from economic distress as investors tend to shun the risky assets, says Chirag Mehta, Senior Fund Manager, Alternative Investments, Quantum Asset Management. According to him, gold prices should clearly head higher on the fundamental basis.
“The extent of economic damage caused by the pandemic has been severe. The global economy will face a protracted economic deceleration, even after the pandemic cools down. This will warrant accommodative policies like bond-buying programs and low interest rates to reignite economic activity over the next few years. As central banks print unprecedented amounts of new money, gold prices should appreciate further,” says Chirag Mehta.
Investors tend to move to gold to maintain the real value in their portfolios, given the low interest rates across the world. Mehta says, “With too much liquidity floating around, there is a probability of higher inflation over the next few years, lowering the purchasing power of the currency you hold and making gold a preferred monetary asset.”
Current prices of gold, still a good entry point
Gold’s price movement in the near term will depend on how fast or slwo the global recovery happens and the duration of extent of the stimulus. Mehta belives, “the yellow metal will continue to play a risk-reducing, return-enhancing role over the long term.”
He delivers a strategy for investors to enter gold. He asks investors to invest 50% now an stagger remaining investment.” Current prices could still be a good entry point for investors to build the bulk of their allocation, say at least 50% of intended allocation and the rest they can accumulate in a staggered way to complete the 10-15% allocation of their portfolio.”
