Gold for 2022: Stability and Impact
Published by Sharekhan Education | March 5, 2022
Gold for 2022: Stability and Impact
Behzad Elavia | Sharekhan Education
Too many investors have agreed with the conclusion that gold is the longest serving currency in the history of trade and commerce for us to dismiss the notion. And for very good reasons – gold is a haven in times of rising inflation, an evergreen form of liquid money, while also simultaneously being a portfolio hedge (due to its inverse relationship with equities). But most critically, gold is a strong counter to any potential erosion of any country’s currency. Today, we intend to review the position of gold for the year 2022 as we also go through the macro events that may influence our assessment.
Reliability in Crisis
You may have heard, we’re living in times of crisis. If the pandemic wasn’t enough, we’re also witnessing the most explosive war Europe has seen since the end of WWII; it’s an event that is disrupting human lives and global economies alike. The war isn’t only taking place on the battlefield; it’s also fought economically, case in point: sanctions. Any sanctions imposed by one country or organisation over another as a result of the Russia-Ukraine war will reflect as prolonged illness for the economy and may also lead to heavy corrections (10-15%) in the equity markets.
It is in times of adversity that gold shines brighter; it acts as the last man standing because it simply cannot go bankrupt as it holds parties to no contractual obligation to liquidate when required. It’s not surprising that gold witnessed a 3-4% jump in just 2 days after the commencement of the Russia-Ukraine war.
Hedge against Volatility
So let’s say we’re in the midst of a crisis, and are facing disruptions in economy, increase in bank rates, currency is plummeting, and everything’s going wrong. This is when gold, which serves as an inflation hedge in the long-term, shows its true value. It has been observed that all the major currencies in the world have depreciated in value when compared to gold, which remains unique as a tangible asset that creates a perception of safety as it can be stored physically/ETF’s, and it requires no specialised knowledge to own it.
The Flipside to Equity
Equity and Gold are inversely proportional. When the price of gold rises, the stock market falls, and so we witness heavy buying of gold ETFs, gold bars/coins when the stock market goes through a bearish phase. We believe the Nifty has almost peaked out from 18600 levels, further giving a (double) lower high confirmation at ~18300 levels, and sliding further.
Considering the barrage of disruptive events such as Covid-19 3.0 and the ongoing war in Europe, it is predicted that the equity markets may further slide to roughly 15,000-15,600 levels. A slide of that extent means a healthy correction of more than 15% from the highs, giving us a terrific opportunity to buy equity from the bottom (as we would have told you in our PAI-XLT courses).
Fed Rate Hike vs. Gold for FY 2022
Looking at the present market conditions, it seems highly likely that FED would increase the interest rates for the remaining 9 months of the calendar year, a move that would further suck out the liquidity out of the equity markets. In an attempt to relieve the rising inflation rates and bearish markets, investors would look to buy the yellow metal as a protective measure to balance out their portfolios.
Investing with Confidence with Growing CAGR
Along with rising inflation, gold prices have doubled in 5 years and have multiplied more than 4 times in past 10-12 years. This means gold has given investors a rate of return relative to buying a real estate property.
Under the present circumstances, it would be prudent for investors to allocate at least 15-20% of their portfolio on Gold ETFs considering gold seems likely to retain its bullish momentum. So that’s all the wisdom we could share with a blog most, for more, there’s always Sharekhan Education.
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