Gold is the world’s oldest currency. It is generally seen as an inflationary hedge. But as the world was in the grips of low inflation, gold was getting ignored. Only in times of economic uncertainty or high inflation does gold attracts world’s attention. But this year finally gold is being perceived as a tool to combat inflationary pressure. Inflation has started to pick up in Europe. Recently, US employment rose the fastest since 2009 fuelling fears of a rise in inflationary pressure. US economy is at or near full employment. More and more dollars coming into the spending stream will primarily pump up prices, raising levels of inflation up.
We are bullish on gold this year. The reason: Compared to stocks, gold is looking like a bargain. Gold to S&P 500 ratio (the number tells you how many ounces of gold it would take to buy the S&P 500 in any given month) is at its lowest point in 10 years. For mean reversion to occur; either the gold price needs to appreciate or share prices need to fall.
Any decline in demand for physical gold from India is compensated by increasing demand from China. Last year because of implementation of GST, India saw a decline in demand for precious metals. According to World Gold Council, China remained the world’s largest consumer of gold bars and coins in 2017, investing in 306.4 metric tons, on the back of strong domestic demand and a rise in young consumers. This trend is expected to continue. China is also world’s largest producer of gold. Global gold mine production finished 2017 fractionally higher than the previous year. However, due to environment concerns in China, output has declined by 9 percent so we expect some tightness in the physical market this year.
Gold right now is not in the limelight because equity markets are soaring. The returns in equity market certainly look attractive but we shouldn’t forget that gold also gave more than 13 percent return last year. In last 15 years, gold has generated an annualized return of 13.66 percent. A quick glance at the chart shows how from year 2000, gold has outperformed S&P 500 by decent margin.
Back home, Nifty50 did manage to outperform gold in last 10 years but the margin was comparatively less. We believe gold will outpace Nifty50 this year.
There is no denying that equity markets are trading at peak (above 25 PE). However this does not mean that equity markets will not perform but looking at the fundamental facts, we do foresee gold still shining. We advocate any investors that investment planning should include all asset class, not just one particular class. Portfolio should be diversified and every investor should have at least 10 percent holding in form of gold in their portfolio. History has shown, gold is wealth creator and whatever economic conditions worsen, there will always be demand for gold. We believe investors should invest in gold.