Is it right time to invest in Gold?
In the last three months, when most of the asset class were showing negative returns, gold glittered. From its recent low of Rs. 2,861 per gram in the month of May 2019, it has increased to Rs. 3,355.94 per gram till August 5, 2019 thus gaining 18 per cent. In USD terms, gold is currently trading at their six-year high.
This has really impacted the gold dedicated funds. A Gold Fund is a mutual fund or ETF (Exchange-Traded Fund) that invests predominantly in gold bullion or gold-producing companies. In case, the fund invests primarily in bullion or in stocks and bonds of gold manufacturers and miners, the price of the shares within these funds will majorly correlate to the spot price of gold. The objective of this fund is to get returns from gold investments in a convenient way.
Most of the funds dedicated to gold have generated returns in double-digit. In the last one year, they have generated returns greater than 20 per cent.
What has led to such returns and how much of this is sustainable? We believe that it is going to be sustainable for the following reasons.
Trade war and geopolitical tension
The geopolitical uncertainty has historically pushed the gold demand higher. The current geopolitical situation is very volatile. The trade war between the world’s two largest economies and conflicts between the United States and Iran are two major concerns supporting gold prices. This situation is likely to remain for some time now.
Central-Bank continues to buy gold
According to the World Gold Council (WCG), central banks world over have purchased gold of about 145.5 metric tonnes in the first quarter of 2019, which remains the highest since 2013. This has continued in the second quarter also. Therefore, the demand for the gold is likely to remain strong going ahead.
Loosening monetary policy
There has been a drastic shift in central-bank strategy around the world. Till a few months ago, central-banks were thinking of monetary tightening, however, the stance has changed towards easing. This has led to increasing investor buying of gold moving the gold prices higher. Lower interest rates present less of an opportunity cost to holding gold, as the metal provides no yield and often comes with storage and insurance fees.