NEW DELHI: Gold, which was the top-performing asset in 2020, has corrected around 16% since 7 August, 2020, when it had closed at a high of ₹55,922 on the MCX. Investors, who bought the asset in the last leg of the rally, could be wondering if they should exit.
Prices of the yellow metal are falling further, as it loses its safe-haven appeal with more covid-19 vaccines getting approval across the world.
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We asked experts what they think about the recent correction in gold and should investors use the dip as a buying opportunity or time to prune their holdings?
Surendra Mehta, National Secretary of the India Bullion and Jewellers Association (IBJA)
There are a couple of reasons for the recent correction in gold prices. The US Dollar index has strengthened against major currencies. The US Dollar and gold are negatively correlated. Therefore as demand for the US Dollar goes up, the price of the yellow metal comes under pressure. Also, US bond yields have risen causing a correction in gold prices. Apart from this, people are looking for investing in riskier assets such as equities and cryptocurrencies. However, I feel this correction is likely to be short-lived and people should use this as an opportunity to accumulate gold. The current rally across assets such as equities is powered by liquidity and is unlikely to last long. If equity markets correct, people will again get into gold as it is a safe haven asset. Also, the US is expected to announce a further stimulus package anytime soon which may drive gold prices higher. I feel gold prices may again touch a high of $1960 per ounce in the next 3-4 months that is around $150 above its current level.
Chirag Mehta, Senior Fund Manager, alternative investments, Quantum Mutual Fund
The main reason for the correction in gold prices is the substantial increase in the US benchmark bond yields. The yield of the 10-year benchmark bond has moved up a lot and surprised the market. After bottoming out at around 0.6% last year in August, it has now more than doubled to 1.37%. So, that has led to some decline in gold prices as rising yields mean increasing interest rates. But I think it won’t sustain, because low yields are needed for recovery and support the debt overhang we have today, so central banks will step in case yields rise further. This will provide support to the yellow metal. Apart from this central banks will continue to debase currencies by helping the government fund further stimulus to support growth which will benefit gold.
Navneet Damani, VP, commodities Research, Motilal Oswal Financial Services Ltd.
The year was rocked by the pandemic that led to economic restrictions and fiscal stimulus measures, boosting the appeal of the precious metal, as a safe haven investment. Apart from vaccine updates, the recent duty cuts announced by the Government of India have also hammered the prices. Although, fundamentals mentioned above continue to create a strong floor for the metal prices. Gold prices have consolidated over the last few months and recently corrected below $1800 on the COMEX where we are comfortable buying for a short to medium perspective targeting new life time highs towards $2150. On the domestic front, the post-budget price correction is a good level to enter once again for an upside towards new highs of Rs.56,500 and above over the next 6-12 months.
While experts remain optimistic about gold prices going forward, gold certainly adds to the diversification of the portfolio. Planners advise people to have around 7-10 % of their portfolio in gold. If you have lower allocation use this as an opportunity to add more gold to your portfolio.