Seeing their equity wealth eroded due to the ongoing global volatility, anxious investors have again started buying gold which has always been seen traditionally as the safe haven asset especially in times of economic turbulence. Genuine worries about the growth prospects of the global economy explains why investors are shifting part of their investment away from the volatile stock markets towards buying either physical gold or gold related financial instruments like gold ETF. The price of 24 carat gold in India has moved up by over 10% in last two months while returns from equity (Sensex) have declined by 7.5% in the same period. “What really brought cheer to gold markets were the signs of risk aversion as other assets like equities, oil et cetera lost ground,” says Chirag Mehta, senior fund manager, Quantum AMC. Slowing global growth, particularly in China, and other tail risks present in the global economy weighed on global markets and drove a rush towards gold.
Analysts expect the year 2016 to be a difficult one in terms of volatility and in such a volatile environment, the allocation towards gold would certainly help investors as gold is one of the best diversification tool (asset class) available today. Indian investors bought gold worth $80 billion in the preceding month of January reflecting the robust appetite for the yellow metal. The overall consumption of gold in the preceding three months has also been good. Besides physical gold, Mehta expects investment demand of gold to move up. As per Quantum AMC, gold ETFs experienced a good buying from investors to the tune of about 55 tonne in January 2016. Typically, people tend to buy more gold when stock markets do not perform well and vice-versa. Slowing down of the world’s second largest economy, China, is going to perpetuate the volatility in the global market with India being no exception to the rule. “And a continued moderation in the world demand could slow the pace of recovery in India,” says Nomura.
Though analysts seem confident about India’s long-term growth story but concerns about the fiscal (slippage) front and non-passage of crucial structural reforms like the GST Bill would keep investors anxious about India’s growth prospects thereby, keeping their passion for gold alive. Experts say that amid ongoing volatility and in an era of experimental Central banking, it’s difficult to forecast whether or not the bottom in gold has been placed. “Given the macroeconomic picture, the downsides look limited in gold and this year will likely mark an inflection point in the yellow metal,” concludes Mehta.