12th August 2020

Worried about the fall in Gold Price?

The sharp pullback in gold over the last 2 days was not totally unexpected. Gold has been rallying
continuosly since Nov 2018 with very small breathers. The current run-up in gold was particularly
sharp and propelled it to make new highs. If we look back on the previous run up to 1900 plus levels
in 2011 ( Please see Chart Below ), there were multiple breathers in the 6 year odd rally from 2005
to 2011. The big pop came in 2008 with the Lehman moment. However, unprecedented liquidity due
to easy monetary policies and easing fiscal prudence combined with uncertainty on economic
growth and the resultant lack of confidence in equity markets resulted in Gold continuing its upward
movement post 2008 correction.

If I were to draw a parallel, the uncertainty in economic growth continues even today as many
businesses will remain shut for longer ( Travel and Tourism, Outdoor Entertainment, Fashion and
apparel etc. and related services and their knock on effect on Financials ). Liquidity is at it highest.
Government Balance Sheets have expanded like never before. Add to all this, there is uncertainty
related to economic isolation of china and global protectionism of domestic industry. Trade wars
may get worse. The US Elections looming round the corner will create further Behavioural Volatility.

Gold thrives in such conditions and makes up for years of underperformance in a short time period.
We have been recommending a 5-10% allocation to gold in an investors portfolio ( depending on the
risk profile) and any correction will be an opportunity to increase gold to the recommended levels.
(Spreading out the purchases over the next 2 months may help). Gold is a long term asset and a
short term correction and resultant panic is a great time to rebalance the portfolio. Gold is poorly
correlated to equities and at times negatively correlated. A bounce in equities and RISK ON can
trigger a correction in gold, which seems to be happenning. For a conservative investor who has 10%
allocation to gold and 20% allocation to equities (trading significantly higher over the last 4 months ),
the benefit of asset allocation in the short term will be apparent. In the long term, both these asset
classes should do well, in line with their risk profiles.

Regards,

Ashish Ranawade, Head of Products, Emkay Global.

Annexure : Gold Price Chart

Source: Investing.com