Financial Express: Buy Gold - Any Correction is a Good Entry Point

April 10, 2020

Article by Chirag Mehta in Financial Express

March 2020 turned out to be a roller-coaster of a month which saw the coronavirus pandemic rapidly intensifying. It saw unprecedented policy actions like synchronized national lockdowns to counter the spread of the virus to monetary policies to cushion the economic disruption. Despite the volatility, gold prices ended the month flattish with a minor loss of -0.1% against other risk assets that saw significant losses, reiterating its diversification role in times of turmoil.

Gold surprised market participants in March by moving in tandem with equities, when it was expected to do the opposite.

Now, when there is a sharp fall in asset markets, you can only sell what is liquid, profitable and has low impact cost, and thus gold saw temporary sell-off on account of a need to raise cash for margin calls to cover losses elsewhere.

Downside corrections in 2008
Gold experienced some downside corrections at the start of the global financial crisis too, weighed down by a world seeking safety of dollars, requiring forced sales of liquid assets. But by the end of 2008, riding on the back of newly announced quantitative easing measures, gold was one of the few assets to post positive returns.

We are beginning to see a similar pattern emerge as gold prices stabilized over the last week and rallied from below $1,500 levels to above $1,600 as the Federal Reserve announced its intention of unlimited bond buying.

We are thus of the view that a healthy gold rally will now resume in spite of turbulent markets and losses in risk assets as there is ample newly injected liquidity in the system, eliminating the need to liquidate positions in gold. The Fed through its various programs is virtually ready to provide liquidity even for troubled assets. It is reasonable to say that a good part of the easy money will now find its way to “store of value” assets like gold till the risk aversion persists, pushing up prices further.

Any correction can be a good entry point for investors to accumulate long-term positions. All those who don’t have 10-15% allocation to gold in their portfolio, should consider it!

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