Akshaya Tritiya is considered to be an auspicious occasion; it is believed that this day brings good fortune and luck in your life. The word “Akshaya” means something that is eternal, never diminishes. This is the reason why people buy gold on this day, believing it will never diminish and help them prosper.
In fact, gold has emerged as one of the best performing assets, delivering around 25% returns in 2019 and around 17% this year.
Why Gold can help you get through the Corona Virus induced Recession:
1) Gold cannot default, go bankrupt or fail to carry out its end of the deal.
2) Unlike equities, gold does not require a business to keep it afloat.
3) As central banks cut rates to stimulate the economy, your bond yields will reduce. This makes holding gold more attractive.
4) Gold is a reliable store of value as it cannot be printed or created at the discretion of central banks.
5) Gold benefits from economic distress and crisis as people shun risky assets and flee to gold’s safety.
However, the nationwide lockdown due to the novel corona virus pandemic has made it difficult for people to buy gold physically. Besides physical gold, another preferred way of buying the yellow metal is through Gold ETFs (exchange traded funds).
There has been a drastic increase in the demand for Gold ETFs because:
• Investing in Gold has long been a safe haven for investors during testing times (like now) because of the opposite trajectory Gold follows to Equity.
• There are fewer options for investing in gold since acquiring physical gold in lock down conditions may not be feasible.
Off late as the demand for gold has gone up; some Gold ETFs are trading at a premium to physical gold prices.
Why are ETFs trading at a premium? Should you buy?
Due to the lockdown, the supply of physical gold remains stagnant and therefore the supply for Gold ETFs is also limited. Some of the vaulting agencies have notified that their vaults in Mumbai, Pune and Nagpur will remain closed till the lock down is in effect. As a result, transferring physical gold through vaults is challenging.
Please remember that Gold ETFs invest in physical gold with each unit of the ETF typically representing 1 gram of gold. Due to the demand supply mismatch, ETFs are trading at a premium as many investors are buying units even at extremely exaggerated spreads.
The higher spreads in Gold ETFs seem to be a temporary phenomenon in view of the lock down which has impacted the physical movement of gold. Once operations return to normalcy, it is expected that the prices may revert to normal levels. However, buying Gold ETFs at such a high premium may not be worthwhile as it is due to the short-term supply disruption which may end with the lockdown.
Asset Allocation sahi hai!
There will be periods when equity markets will have a brilliant run, periods when only bonds will be dependable, and periods when gold will shine the brightest. These periods will usually not overlap. So by itself, an asset class can be quite volatile, but a mix of assets can lower volatility. Reason being historically when one asset type has average or poor returns; the other usually performs well.
Source: Bloomberg
Thus, concentrating investments in a single asset class (typically Fixed Deposits in India) is one of the biggest mistakes that investors can make. At least a portion of the investment portfolio should be allocated to asset classes that perform well in different economic environments. Given the unpredictability of potential economic outcomes in today’s uncertain times, holding a balanced portfolio that includes diversified assets is prudent.
