Gold, not equities, likely to be hot in 2020; experts say increase allocation

Gold is likely to shine brighter than equities for the second year in a row driven by geopolitical concerns, trade wars, a slowing global economy and dovish central banks, which will drive the demand for the safe haven in 2020.

Comex gold advanced 14 percent in 2019, while at MCX, gold outperformed Indian equity indices to clock 24.5 percent annual return. The Nifty climbed 12 percent in the same period.

The gold rally is not over and the yellow metal could touch Rs 45,000 per gram in 2020, say experts. Investors should ideally increase their allocation for gold in the new year, they say. The allocation can vary from 5-15 percent, depending on the risk appetite.

Fall in global growth and a loose monetary policy from central bankers are the strong tailwinds for the yellow metal.

Globally, central banks are expected to remain net buyers of gold in 2020 amid geopolitical uncertainties. The interest-rate climate also remains conducive for gold, as phase one of the US-China trade deal is more like a tip of an iceberg and unlikely to be resolved fully in 2020.

“The International rating agencies and research houses have downwardly revised Indian growth to be around 4.8-5%. The RBI has also cut down its growth forecast for the current fiscal year to 5 percent from early forecast of 6 percent,” Praveen Singh, AVP, Fundamental Research–Commodities, Sharekhan by BNP Paribas, told Moneycontrol.

“US Fed, ECB BOJ and PBoC are likely to keep the loose monetary policy to revive growth in the respective zone a big supportive for gold to rally. We see another outperforming year for gold with an average return of around 15 percent. We expect gold prices to touch Rs 45,000 per 10 grams in 2020,” he said.

Gains in 2019 were largely driven by trade wars, a slowing global economy, dovish central banks and on-off geopolitical disruptions, leading to a 24 percent rally in a year. The rupee also played a part in the second half of the year.

“The Nifty50 registered a respectable return of 12% but was well below the returns generated by gold. The trend is expected to continue this year, as the world calibrates the impact of Phase 1 of the trade deal and in the face of a weakening USD,” Pritam Kumar Patnaik, Head Commodities, Reliance Commodities, said.

“The dollar index is expected to remain relatively weaker in the coming year, as the global economy recovers and the safe-haven flows to USD will be impacted. Thus, one can expect 12-15% returns this calendar year,” he said.

What should investors do?

Considering the fact that the metal is likely to outperform equities in 2020, investors should use dips to buy into gold to increase their allocation. Gold is used as a hedge against volatility in equity markets.

One should look to diversify their portfolio into multiple asset classes, and the amount which one needs to allocate should be a percentage of the total investable surplus and a function of one’s risk appetite, financial goals, and liquidity needs, say experts.

Gold is kept in the portfolio as a hedging tool against an uncertain business climate. “Equity asset class are known for providing exceptional returns to the holders but a tag of the higher risk associated with them always undermine their complete surrounding in the portfolio,” Mahek Tomer, CEO, Advisorymandi.com, told Moneycontrol.

“Keeping in mind the annualised volatility of the Indian benchmark that is running at 12.64%, almost at lower levels of the year. The portfolio should be surrounded with at least 15% safe-haven asset.”

The yellow metal works as a safe-haven bet during the simmering geopolitical concerns and economic uncertainties. In 2020, the world has to deal with Brexit, the Hong Kong liberation bill, the US-North Korea nuclear pact, and militancy engraved Middle East and North Africa (MENA) region, experts say.

“On rule of thumb, 5-10 percent of investment is allocated in gold, but we recommend allocate 15-20% in gold for 2020 with a long-term horizon, as during turmoil in financial markets, weakness in risk assets, war-like situations, geopolitical tensions and economic slowdown, gold will likely attract investors as a safe- haven asset,” said Singh of Sharekhan by BNP Paribas.

“Surge in gold prices will offset the decline in portfolio value. Buying gold is effective insurance for the portfolio. Also, in 2020 we have major upcoming events like Brexit and US election.”

Courtesy: MoneyControl