Top 5 things you should know with gold price at life time highs


Gold has embarked on a frenetic rally in the past few months. This trend is evident in India as well as in the global gold markets. While global gold prices have settled above $1500/oz for some time now, gold prices (per 10 grams) in India crossed the Rs40,000/10 grams and also the Rs.41,000 mark post the US drone attacks in Iraq. With Iran threatening to retaliate, the situation in the Middle East is again threatening to escalate. Iran has control over the Strait of Hormuz which controls 30% of the global oil movement. In this scenario, gold becomes the default safe haven. But, then the rally in gold prices in India has already seen a rally of more than 30% in the last 1-year. Take look at the chart below.
In fact, this time around, the rupee gold price has clearly outperformed the dollar gold price and this difference in returns can be attributed to the rupee depreciation vis-à-vis dollar. Globally, the price of gold continues to quote above $1500/oz; although still lower than the $1850/oz touched at the peak of September 2011. But, in the Indian context, the gold prices are at life-time highs, due to the combination of the dollar effect. What exactly does this rally in gold prices mean and does it have larger takeaways for portfolio allocation?

Key takeaways from the rise in gold price
Gold has always been an essential part of any portfolio and here are the five key takeaways for investors and portfolio allocators alike.

1. The difference in returns between global gold and Indian gold is due to the weakening of the rupee. International gold prices are always denominated in US dollars, and hence, any weakening of the dollar means an increase in rupee gold price. That explains why the rupee gold price returns have done better than the international spot gold. Indian rupee gold gets impacted by the rupee/dollar exchange rate also. From a portfolio perspective, it means that gold provides a hedge against global uncertainty as well as rupee weakness versus the dollar.

2. There is a massive wealth gold effect in India which not too many are talking about. Did you know how much gold is held by Indian households? Indian households possess gold to the tune of 22,500 tonnes (you heard it right). Can you imagine what the value of this gold is? Let us do some maths; 22,500 tonnes of gold translates into 22.50 billion grams of gold. Considering that the Indian price is currently Rs4,100/gram that translates into gold holding value of $1.30 trillion. To put in perspective, it is nearly 70% of the market cap of the Indian stock exchanges and nearly 45% of India’s annual GDP. Assuming that the gold prices have appreciated by 23% YTD, it has resulted in gold wealth creation to the tune of $240 billion since January 2019. That is the kind of gold wealth households have created since January this year and it is getting monetized. So Indians really don’t have too many reasons to complain.

3. Gold has an inverse relationship with uncertainty and today the global uncertainty is elevated due to a number of reasons. The recent drone attacks by the US on a senior Iranian military functionary are only going to make the Middle East more volatile. Already, the Kingdom of Saudi Arabia and Iran have been fighting a proxy war for years to gain an upper hand in the region. The trade war has shown signs of resolution but China has shown in the past that they can drive hard bargains and Trump may not be too enthusiastic about a deal without the optics. BREXIT appears to see more of euphoria than reasoning and it is really the X-factor as it is not clear how much the impact would be. Under this pall of uncertainty, gold could be one asset class to watch out for.

4. Gold should be a part of every long term investment portfolio and the allocation must be in the range of 10-15%. It provides a solid hedge in uncertain times. At supportive times like these, it makes sense to push the allocation closer to 15%. However, pushing gold allocation above this level is not advisable, notwithstanding short term triggers.

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