Gold Investment Strategy: Vaccinations are accelerating around the world and macroeconomic conditions are improving. Due to this, investors are giving priority to investing in risk assets. Gold prices continued to fluctuate in July due to increased exposure to risk assets, though it covered most of the fall by the end of last month. Due to the weak US economic data from the Federal Open Market Committee’s statement and estimates, the dollar weakened. Due to this, gold rose by 2 percent to reach the price of $ 1815. US GDP grew at 6.5 percent annually in the second quarter, contrary to market estimates. Instead of investing heavily in gold despite strong fundamentals, maintaining an exposure of 10-15 per cent would be enough at this point of time.
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Fundamentals are positive about gold prices
- The US Federal Bank, in its July announcement of its monetary policies, had kept the benchmark rate unchanged in the range of 0-0.25 per cent and will continue to buy 12 thousand crore monthly bonds. There is no definite timeline for the fall in this, but according to the market pricing, it may happen in the first quarter of next year in January-March 2022.
- In the US, the Centers for Disease Control and Prevention has changed its guidelines regarding corona and people who have been vaccinated have also been advised to wear masks in indoor places. In such a situation, investors believe that if the delta variant spreads in America, then the Fed can relax its policies. Gold will get support from monetary support.
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- US 10-year Treasury yields fell to 1.25 per cent from 1.5 per cent in July, keeping the real Treasury yield at (-)1.15 per cent, despite discussions over rising inflation and falling rates. Falling yields indicate slow economic growth. Fall in yields and high inflation can lead to stagflation which will make investing in gold attractive.
- Ideally, the Fed will reduce asset purchases to keep inflation under check and increase rates at the right time, which will help stabilize economic growth. However, this will have a negative impact on the economic recovery. At the same time, the Fed can also try too much, too soon or too few options, this will increase the concern about inflation. Both these situations will benefit Gold.
Maintain gold exposure of 10-15%
Fundamentals are very strong regarding the upside movement of gold price but due to macroeconomic developments, a situation of contradiction is being created. Because of this, the prices of gold are likely to remain under pressure and in the near term its prices may remain range bound i.e., a further rise in its price cannot be expected. In such a situation, investors should avoid over-investing in gold. However, they should maintain an exposure of 10-15 per cent in their portfolio to gold.
(Article: Chirag Mehta, Senior Fund Manager, Alternative Investments, Quantum Mutual Fund. These are the views and opinions of the author and are not affiliated with Financial Express Online. Before taking any investment decision, please consult your advisor. take it.)