Is it worth increasing exposure to gold at this moment?

The financial market around the world saw huge volatility this year. Despite witnessing a steep fall in the first quarter of CY20, its recovery in the second and third quarter was quite remarkable. This recovery was on the back of swift action of governments and central banks providing support in the form of fiscal stimulus and lower interest rates.

In all this turmoil, one asset class that significantly outperformed was gold. The dream run of gold had started in the year 2019, which continues till now albeit at a slower pace. Even the most pessimists on gold prices became optimists and the best example was Warren Buffett. So, should you also increase exposure to gold?

Nevertheless, gold has been considered a safe-haven investment for a long time now. This is largely due to the fact that the price of gold is independent of other asset classes, which means that metal has generally performed well during periods of market stress or volatility. Historically, we have seen that there is a negative correlation between gold and other asset classes such as equity and debt. Hence, the price of gold increases whenever there is a significant decline in the equity market as the same was witnessed recently.

Another reason why gold forms a part & parcel of many investors' portfolios is that it’s considered as a hedge against inflation. Nonetheless, the metal did provide significant protection during the high inflationary period; however, during more muted periods of inflation, gold delivered negative returns, lagging equity markets in the process.

Going ahead, we may see an uptick in inflation due to fiscal stimulus and loose monetary policy. Therefore, it seems that investing in gold makes a good investment decision. However, if we look at the rise in gold prices, we would notice that most of this has already been offered at a discounted rate. According to a report by Morningstar, “On a real basis (after inflation), gold is already expensive and could therefore suffer a material drawdown, on our analysis.”

Therefore, we believe that you should continue with your current investment in gold but do not increase and rebalance your portfolio periodically as it will automatically take care of any anomaly in the weightage of gold in your portfolio.