Why does Gold have relevance today?

When human civilization was evolving from a hunter-gatherer to include farming and other activities. There was a need to move into a social community with each one specializing in their profession. It started the barter system of exchanging goods and services, but it came with its limitations.

Before the paper currency took over, metals played the role of store of value. One metal stood out due to its lustrous quality and being malleable at high temperatures. Gold is also relatively limited in availability and very difficult to extract. But it hit the sweet spot, it also isn’t so rare like platinum that there wasn’t enough to use.

With the advent of paper currency, Gold has retained its use as a store of value and the primary precious metal used in jewellery. The dollar has its limitations as a reserve currency due to the Fed’s policy to consider the USA’s inflation and employment rather than global issues. Bitcoin and other cryptocurrencies have also turned out to be too volatile and don’t seem to provide the comfort and safety of gold.

Gold is always easy to invest in, there are digital ways to own and sell gold without owning the physical metal.  It is always used as a hedge asset, against Global Equity, Currency, and Commodities. It performs best whenever there’s a major crisis. Gold has had a relatively subdued performance since 2012 until 2019. But, it went up significantly within weeks when COVID lockdowns began.

No one can predict how big a disruption it is, the depth of the same., and the consequences. But gold prices will see an immediate uptick whenever there’s a crisis.

Let us refer to the two big upsets in Equity markets in the last couple of decades – One is 2008-11 (Subprime) and 2019-2020 (COVID-19).

Year Gold Price INR (24 Karat 10 Gram) Nature of crisis
2008 12,500 Subprime crisis & Asset Bubble
2011 26,400
2019 35,220 COVID 19 spread & Lockdown
2020 48,651
2023 65,335

 

Between 2008-2011- Gold has generated 28% CAGR

Between 2019-2023 – Gold has generated 17% CAGR

However, in between these years – Gold severely underperforms all other asset classes.

Gold is held in the portfolio to hedge the risk from other volatile assets. It may not be a bad idea to vary the weightage to Gold as a tactical move to benefit from its performance during certain periods. And switch back to lower weightage after its run-up. How does 2024 look for gold after a decent run from 2019-23?

Apart from uncertain times, whenever the Central banks expand the balance sheet, it fuels a rally in the gold prices.  When COVID-19 hit, and lockdowns were announced. Firstly, the uncertainty of where the world is heading fuels a rally in gold and massive upheaval in the other assets.

Secondly– to counter the sudden announcement of the lockdown – Some central banks decided to inject liquidity into the system as their monetary policy (USA Federal Bank – made their interest rate zero during COVID), printing their currency continuously to aid their citizens.  It made their Balance sheet bigger. It eventually raised their inflation to all-time highs.

As the economies strutted back to life as we learnt to live with COVID. To counter the inflation, they have started raising interest rates.  In some time, they must reduce the interest rate to support growth, we are standing at a crossroads as we head into 2024. Most experts predict a 75bps rate cut by the Fed, starting in the second half.

Now Fed and other central banks don’t have other choice, but to normalise their balance sheet.  For that, they must reduce the interest rate in a phased manner.  Once the rate cut starts, the momentum will start in the yellow metal, even now the current gold price discount a rate cut factored in. Once the Fed brings normalcy in Interest rates, which markets expect to last for two years, we expect it to drive the yellow metal to a higher level.  If there is a dip before rate cuts start, adding more Gold to your portfolio may not be a bad idea.

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