SANJAY KUMAR SINGH Gold could be a safe haven

The ongoing trade war and the Fed’s decision to reduce the number of rate hikes are positives for the yellow metal

The equity markets are currently under pressure, with the Nifty down 1.89 per cent and the Nifty MidCap 50 down 5.30 per cent year-to-date (YTD). The volatility in 10-year G-sec yield has caused returns from longerterm debt funds to see-saw in recent months. The slowdown in real estate continues. One option that investors should include in their portfolios at this juncture is gold, which is up 4.26 per cent YTD.

The first factor that will determine the course of gold this year is the US Fed’s actions and their effect on real interest rates. The US’s central bank has said it would hike rates thrice this year. It has done so once. Before the Fed meeting of March 20-21, the market was anticipating four hikes. Once it announced that it will raise rates only thrice, gold rallied. Fewer rate hikes mean that real interest rates will move up less. Higher positive real interest rates tend to be negative for the yellow metal. “Any further failure of the US Fed to hike rates will help gold climb further,” said Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management Company (AMC).

Liquidity, too, will have an effect. This year, with central banks either raising rates or rolling back their liquidity injection programmes, liquidity will grow at a much slower pace. Financial markets, which have become accustomed to high liquidity since the 2008 crisis, could react adversely. “Currently there is a feeling of well-being among investors owing to high asset prices. If the markets correct, people will feel poorer and hence consume less.

This could affect US economic growth,” said Mehta. If the markets are not doing well and the economic outlook is also clouded, that will be positive for gold.

The ongoing trade war between the US and China is also supporting the price of gold. Its true effect will, however, become apparent only over long term. Higher tariffs will lead to an increase in the prices of imported goods, and could end up being inflationary. Inflationary conditions tend to be positive for the yellow metal.

If the trade war escalates further, it will also affect US economic growth and push the Fed to go for fewer rate hikes. This will again be good for gold.

The trade war could also affect the dollar. Currently many central banks park their reserves in the greenback. If trade moves away from the US, many of them could reduce their dollar holdings, driving its value lower. A weaker dollar is positive for gold.

If the above-mentioned scenarios pan out as described, 2018 could be a good year for gold. Investors should under all conditions hold 10-15 per cent of their portfolio in the yellow metal. Mehta said back-testing over the long term had shown that such an allocation tends to lower portfolio risk considerably while increasing returns marginally.

Use sovereign gold bonds to invest in the yellow metal. “Invest in them only as part of a long-term portfolio such as retirement. Exiting these bonds via the exchanges is difficult. Trading volumes tend to be low and you may have to sell at a considerable discount,” said Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor. Sovereign gold bonds do allow you to exit (by selling back to the government) after five years. Avoid investing in gold for the short or medium term as you could sustain losses: Currently the five-year return from gold is only 0.68 per cent. Gold exchangetraded funds are more liquid than sovereign gold bonds but carry an expense ratio of 0.57-1.06 per cent.