Caution, gold investors: As prices hit all-time high, watch out for these factors before buying more

Surbhi Jain
Gold price today

Gold prices hit an all-time high earlier this week as investors around the world shunned riskier assets after the number of new coronavirus cases in China overtook fresh cases elsewhere. Germany announced that it was on the brink of an epidemic, and Bloomberg News reported citing a Food and Drug Administration official that the virus was on the cusp of a pandemic. Moreover, oil and Asian share markets too slipped in Thursday’s trade as the rapid global spread of the coronavirus kept investors edgy, seeking safety in gold and bonds. 

On Monday, gold prices surpassed Rs 43,000 per 10 grams for the first time ever in India on the back of increasing coronavirus cases around the world. Since then, gold prices have moved south as the yellow metal is witnessing some retracement from the high point. "This retracement is just a kind of technical throwback that usually occurs when there is a short-term buying exhaustion that happens after a rally that initiates after a breakout. Gold had given a breakout from a prolonged sideways movement," technical analyst Milan Vaishnav, CMT, MSTA, told Financial Express Online.

Analysts attribute many reasons behind the recent rally in gold prices such as lower global growth forecast, geopolitical tension between US-Iran, US-China phase one trade deal agreement, Brexit and coronavirus. "In the two months of the year 2020 gold has delivered almost 12 per cent return. Coronavirus gave a major hit on gold prices. Virus cases are still increasing," Anuj Gupta, Deputy Vice President-Research, Angel Broking Ltd told Financial Express Online. This year, January was full of events that supported the rally in gold prices. "Coronavirus had forced China to extend its Lunar New Year holidays and now the economic impact from the virus is difficult to calculate," Jigar Trivedi, Fundamental Research Analyst – Commodities, Anand Rathi Shares and Stock Brokers told Financial Express Online.

Is it a good time to invest in gold?

Analysts are of the view that investment in gold should be done with a long term perspective. "For the immediate short-term, we may see gold prices consolidate in a defined range. However, it definitely forms a case for a longer-term perspective for investment, " Milan Vaishnav said.  In the past one year, yellow metal has delivered around 25 per cent return to the investors. From the gold allocation point of view, Anuj Gupta says, at least 30% of the portfolio should be diversified in gold. "Here if the equity market gives negative then gold will give positive return and curb the negative return in the overall portfolio. We expect the rally in gold may continue on the back of the negative reasons for global growth," he further added as saying. 

However, investors are advised to exercise extreme caution and not to get carried away while making investments in gold. "While sentiment has driven the yellow metal so far and sentiment alone is unlikely to retain it for long. "Ground reality will hit sooner than later. Consumption demand in two of the biggest markets – China and India are subdued because of record local prices. One factor which is supporting the rally is investment demand. This time not only SPDR Gold ETF has managed to attract inflows, but gold-backed all ETFs have also seen an all-time highest inflows in February," Jigar Trivedi said. Seeing the current movement in the gold price, he further added saying, it is likely to be a short-lived rally.

Will gold continue to shine in 2020?

Amid volatility in equity markets, gold is expected to shine in 2020. "Even if we take recent news events out of the picture, the broader technical structure of the equity markets remains weak. This will keep the gold prices buoyant, or at least let it not decline much from current levels. For 2020, over the next three quarters, the gold may test the 1700-1750 levels if the weakness in the global markets continues to persist, says Milan Vaishnav. While other factors such as trade war friction, US elections, FED policy, weak global growth outlook, central bank buying and strong investment demand will aid the gold prices in 2020, Trivedi said.