“When in Rome, do what the Romans do,” goes the adage. Yet, when it comes to gold investment, following the Romans anywhere may just make sense. After all, Romans were the ones who knew the intrinsic worth of gold 2500 years ago. They placed a high value on it, not just as a commodity but as a storage of wealth. They were the first to use and mint gold coins as currency, starting a trend that would define the course of modern-day economies.
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The yellow metal has historically proven to be a relatively safe bet and a tried-and-tested avenue to seek a hedge against inflation, portfolio diversification and earning moderate medium-to-long-term returns. There has never been any doubt about the long-term bullish potential of gold against any currency in the world as all the world currencies have lost value against gold in the last five decades. Since 1971, several major currencies have experienced significant depreciations relative to the value of gold, including the US dollar (98.27%), the euro (98.3%), the Swiss franc (92.26%), Japanese yen (95.67%), and the Indian rupee (99.9%).
Gold in the last 12 years
Gold has been one of the worst investments in dollar terms in the last 12 years and has delivered a negative return during this period if you account for the holding cost. Since 2011, the dollar has
lost 27 per cent of its purchasing value and it has also lost value against everything except gold, implying that gold has lost value against all consumables since then.
In rupee terms, gold has not done badly in the last 12 years due to the massive depreciation in rupee against dollar and the rise in import duties on gold in India.
However, in the current macroeconomic and geo-political context, there are strong prospects of earning exceptional returns from gold, especially in an investment horizon of three to four years.
Interest rates may ease
We believe that interest rates in the US and much of the rest of the world are very close to their cycle tops. We believe interest rates will start falling in most parts of the world in the next 12 months. Gold has an old history of performing well in periods of falling interest rates. This positive correlation between gold and falling interest rates is further accentuated if the dollar isn’t going up.
In this economic cycle, the dollar has done extremely well so far because of the relative strength of the US economy and the rest of the world. It is very likely that whenever the next slowdown happens, the dollar will largely remain sideways to bearish and even if the dollar increases, it would be by a small percentage proving to be very positive for precious metals.
Upcoming global slowdown
We see a global slowdown setting in over the next nine months and in all likelihood this slowdown will snowball into a global recession. During a slowdown, a lot of money would move from risk assets to safe havens like gold, further making the macro construct very attractive for this asset class.
The Chinese economy is looking extremely vulnerable and the Chinese Yuan will be prone to bouts of devaluation over the next 3 years. This could result in most of the Emerging Market (EM) currencies losing value against the dollar and euro, including the Indian rupee. If this were to happen, then gold in terms of Indian rupees is going to go up even faster than it goes up against the dollar.
Next 3-4 years outlook
Gold is probably one of the best investments in the world right now for a three-four year horizon. We believe that gold could more than double in dollar and rupee terms.
Moreover, we see gold miners as an even more compelling investment prospect because while there has been a substantial rise in the cost of gold mining over the past 12 years, the price of gold has remained relatively stable. This situation has led to meagre profitability for gold mining companies at current gold price levels. If gold appreciates by 100 per cent in dollar terms, the profitability of gold mining companies could witness an astounding surge of up to 1,000 per cent.
Consequently, their stock prices may experience a substantial uptick, potentially ranging anywhere from 500 per cent to 700 per cent over the next three-four years.
Further, gold follows a cyclical pattern where the time difference between trough to the crest of the price curve is about 11-12 years and the price bottomed out in dollar terms in December 2015 at $1,032, hence we can expect a massive upward trend in gold for the next three-four years.
The author is Co-Founder and Chief Global Strategist at Pace 360