Gold, silver prices at all-time highs: Is it time to buy, or wait for some correction

As gold prices are at multi-year highs in both domestic and international markets, investors wanting to invest in yellow metal are in two minds on whether they should invest or wait for some correction to happen. Prathamesh Mallya, AVP – Research Non-Agri Commodities and Currencies, Angel Broking Ltd, says that it is wrong to time the gold market as there is no right or wrong time to make an investment in the yellow metal. On a year-to-date (YTD) basis, gold has risen over 43 per cent while silver has delivered more than 62 per cent return. In an interview with Surbhi Jain of Financial Express, he said that the gold rally will continue until green shoots of recovery are visible. He further shed light on a few factors that may halt the rally in both gold and silver in the coming days.

1. With gold at Rs 56k per 10 gm in August, where do you expect gold prices by year-end? Is there more to this rally or will it take a breather?

2. Going ahead, what are the key factors that may halt this rally in gold and silver?

If the rally has to halt, there has to be optimism on global markets. It can be in the form of recovery in the manufacturing as well as industrial sector. The job markets in the US is a concern, and if the NFP data releases today shows an adverse number, the rally in gold and silver prices will gain momentum.

3. With all-time highs this year, do you feel silver is the new gold?

Silver has always been the poor man’s gold and with triple-digit returns already in the commodity, the rally seems to be overheated and a 10 per cent possible correction cannot be ruled out looking at how steep the rally is.

4. Investors wanting to invest in yellow metal should give it a miss in the current scenario or wait some time for a correction?

There is no right or wrong time to invest in gold. In India, the desire to hold the gold in physical possession is purely on the basis of need (specifically for religious functions, marriage, birthdays). Hence, it would be incorrect to time the gold markets as well as prices. The ideal allocation in any portfolio should be around 10%, however, taking into consideration the uncertain global economy, the allocation should be increased to 15%.

Investors who have missed the rally in both the metals should wait for a sizable correction, rather than buying at elevated levels. For those who are long term investors, SGB or Sovereign Gold Bonds issued by the Government of India is a good option.

5. What are your views on the sovereign gold bond (SGB) scheme 2020-21, which opened this week? Should investors subscribe to it?

SGBs are a good way of investing digitally in the asset. Since gold constitutes the major imports for the Indian economy and the major outflow of foreign currency, the gold bond scheme introduced by the Government of India will be key for the investors who want to diversify their portfolio in gold.

6. Which according to you is the best way to invest in gold? Should investors invest in gold funds?

Although there are several ways one can buy gold, Indian consumers are fond of buying physical gold as the safest option. However, the restrictions, lockdowns and other measures due to the pandemic has dented physical demand for gold in India. In that case, Gold Accumulation Plans are the safest bets and the way it works. Mobile wallet providers like Paytm, PhonePe, Google Pay, etc. have started offering digital gold. These digital players are selling gold in collaboration with MMTC-PAMP. Some of them have collaborated with SafeGold, a digital platform that has tied up with various mobile wallet apps allowing customers to buy, sell and receive vaulted gold from as low as Re 1. Both MMTC-PAMP and SafeGold, offer gold of 24KT. However, in terms of fineness, MMTC-PAMP offers gold of 999.9 per cent purity whereas SafeGold offers 99.5 per cent purity.

Gold ETF does not enjoy much popularity in India, it is popular for international investors, hence this option is ruled out for Indian investors.

7. Where do you expect silver prices in near to medium term? How have other metals fared so far?

An alternative investment in a relatively volatile market and a proxy to gold is what defines the investment in this asset class. The movers and shakers for silver prices in the second half of 2020 will be a combination of potent forces of heavy industrial use, investment demand and its strategic importance as a currency hedge during times of uncertainty. Rising investment demand as witnessed in 2019 and a similar trend to continue in 2020 will ensure that silver prices will rise further from here on. Next possible mark in the Indian markets can be Rs 80,000 per kg.

The chart above clearly explains the rally in all the metals with double-digit returns of more than 20 per cent in Zinc, Copper, and Nickel while Lead rallies by around 10 per cent in the time frame 16th March 2020 to 05th August 2020. The global economy is slowly opening up and the recent manufacturing numbers released from the US, Euro area and Japan is an indication of possible green-shoots of recovery, although it is too early to say at this point in time.

The recent projections from the International Monetary Fund said a global economic contraction of 4.9 per cent in 2020 adds pessimism to the story. However, hope is the only belief that this world has now and things will be back to normal is what the presumption is after the Central banks across the globe have infused massive amounts of liquidity to bring back normalcy in the economy.

The demand destruction has already happened and it will resume its normal course once every country starts resuming its normal course of work and operations. Base Metals recovery here to stay for the time being, however, a note of caution attached, as the recovery of the global economy from this pandemic might take longer time than usual.