Both equities, gold have risks; focus on capital preservation
In the short term and medium term, we do not expect gold to rally and exposure should be only for diversification purposes this year. Indian equity markets are also expected to underperform this year given the phenomenal returns over last year.
The BSE Sensex hit a new high of 36373.44 on Wednesday before sliding below its previous day’s close, while Gold hit a 5-month low of Rs 30,800 per 10 gram in the domestic market. In the international market, gold prices have been under pressure due to rising global concerns, including issues on Brexit and strengthening the dollar.
Gold is considered to be a safe haven asset and a hedge against inflation however recent trends are to the contrary. Even with heightened geopolitical un-certainty, gold prices have not firmed up. In fact, gold prices have been down for the year. A robust US economy, firming of the US interest rate regime and the consequent strength in the US dollar has been mostly responsible for the slide in the global gold prices. As shown in the following chart, there is a very strong negative correlation between gold prices and the US Dollar. The chart compares the daily LBMA fix a gold price with the daily closing price for the broad trade-weighted US dollar index in 2018, and if the trend continues with further strengthening of the US dollar we can expect the gold prices to remain subdued.
Gold supplies remain at elevated levels. For the year-end, 2017 supply was 9,038 ton against a demand of 8,496 ton. For the first quarter of 2018, the demand continued to remain weak. Looking at various factors we do not see a bull case for gold. The only scenario where we expect gold to outperform would be the one in which the current tariff wars impacting US economy negatively and consequently the weakening of the US economy and hence the US dollar. Another possible bull scenario for the gold prices would be one where the Central banks around the world dump their US dollar reserves in favor of gold but that would be a long-term phenomenon. In the short term gold prices are expected to remain under pressure and the ongoing tariff wars and its consequences globally would determine the trajectory of the Gold in the short and near term.
Gold has traded in a range in the April-June quarter; it is believed that this is simply a seasonally weak period for the yellow metal with demand staying sluggish and global supply staying at elevated levels. Over the course of last six months, gold returns have been negative by almost 5%. Gold is expected to trade in a range with a negative bias. Currently, we are looking at $1,250 as a major support and if gold prices breach those levels the next support would be around $1,220. As an investment option, we do not see a bull case for gold at-least in the near term. In the current context a lot will depend on the global tariff wars and how does it impact global growth.
Therefore in our opinion, the exposure to gold should be only for diversification purposes this year. Indian equity markets are also expected to underperform this year given the phenomenal returns over last year. Therefore we do not expect double-digit returns from the equity markets either. In this context investment strategy for this year should be focused on capital preservation, large-cap names in the Equity markets with good dividend yields should be considered as an investment option.
Source-www.moneycontrol.com
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