Gold outperforms all asset class as Covid uncertainty looms

Gold saw a remarkable performance in the first half of 2020, increasing by 17 per cent in US-dollar terms and significantly outperforming all other major asset classes.

The LBMA Gold Price PM was trading close to $1,770/oz as of June-end, a level not seen since 2012, and gold prices were reaching record or near-record highs in all other major currencies, said the World Gold Council mid-year outlook report.

The Indian economy slowed to 11-year low of 3.1 per cent in March quarter. So in order to stimulate the economy amid the Covid outbreak, RBI cut interest rates by a cumulative 115 bps in first half of the year and the central government, along with RBI, provided an economic package of ₹20.97 lakh crore.

In second half this year, WGC expects consumer demand in India to remain soft due to reduced economic activity, concerns about increasing unemployment, and income erosion. However, additional economic packages from the government and a positive monsoon season forecast could help soften the impact of an economic deceleration.

Additionally, WGC expects investors to buy gold for hedging as seen in the first half of this year.

Though equity markets around the world rebounded sharply from their Q1 lows, the high level of uncertainty surrounding the Covid pandemic and the ultra-low interest rate environment supported strong flight-to-quality flows.

The IMF is currently projecting a 4.9 per cent contraction in global growth in 2020, with high levels of unemployment and wealth destruction.

In response to the pandemic, central banks around the world have aggressively cut rates and expanded asset purchasing programmes to stabilise and stimulate their economies. However, these actions are leading to several unintended consequences on asset performance. Equity market valuations are soaring without backing of fundamentals, increasing the chance of pullbacks.

In addition, widespread fiscal stimuli and ballooning government debt levels are raising concerns about a long-term run up of inflation, or significant erosion of the value of fiat currencies.

Deflation, however, is seen by some as the more likely risk in the near term, said the report.

Going forward, WGC does not believe investors will achieve the same bond returns as they have seen over the past few decades.

Lower rates will increase the pressure on the ability to match their liabilities and limit the effectiveness of bonds in reducing risk. In this context, investors may consider gold as a viable substitute for part of their bond exposure, said WGC report.

COMMENT NOW