Is It A Good Time To buy Gold Since It Has Declined By 20% From Peak Levels?

(March 23rd, 2021 - Amitabh Tiwari)

The economic recovery after the pandemic, vaccination programs around the world and an increase in bond yields have led to the decline in prices.

Gold is one of the most favored investment options for our countrymen. India tops the list in consumption of gold jewelry in the world. Along with China, India accounts for close to 60% of world consumption.

However, gold demand in India hit a 25-year low at 446.4 tonnes in 2020, compared with 690.4 tonnes in 2019 due to the COVID-19 induced lockdown and on account of record high prices, as per the World Gold Council.

Total jewellery demand in India for 2020 was down by 42% at 315.9 tonnes as compared with 544.6 tonnes in 2019. Total investment demand for the calendar year was down by 11% at 130.4 tonnes in comparison with 145.8 tonnes in the previous year.

Gold is considered as a hedge to inflation. It tends to perform well in times of economic crisis. Normally one should have around 10% of a long term portfolio in gold. It helps in diversifying the portfolio of assets.

If we compare the performance of gold versus equity investment over the last few years, gold has left equities way behind from 2008 to 2013 primarily due to high inflation during the period.

Since 2014, equity returns have been beating gold returns by a huge margin as the economic scenario started to improve. The trend reversed in 2019 and 2020 in the pandemic year amidst lockdowns and the work from home scenario.

Gold prices are dependent on the supply-demand dynamics, geopolitical events, and value of the US dollar. The supply of gold is limited and it cannot be valued like other financial assets, equity or debt, on the basis of cash flows.

Inflation is inching up and bond yields are hardening across the world. The equity markets have been tumbling across the world due to higher crude oil prices, rising coronavirus cases and the reasons mentioned above.

Now since the prices have declined, is it a good time to buy gold? Have the gold prices bottomed out?