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How will trade tensions between US and China impact gold?

Investors need to have around 5-10% exposure to gold. (Photo:iStock)Premium
Investors need to have around 5-10% exposure to gold. (Photo:iStock)

  • The fear of a new trade war between the two countries is expected to increase the demand for safe haven assets such as gold, especially given the poor state of the global economy.
  • Gold is a good asset class to have in your portfolio to provide diversification, but stick to a set asset allocation and don't go overboard.

Gold prices have rallied around 45% in the past one year and experts feel there is more room for a price rise as tensions between the US and China has once again escalated over the covid-19 outbreak.

US President Donal Trump on Sunday said that he believes that the outbreak was the result of a “horrible mistake" by China. According to a Reuters report, the Trump administration is “turbocharging" an initiative to remove global industrial supply chains from China as it weighs new tariffs to punish Beijing for its handling of the pandemic.

The fear of a new trade war between the two countries is expected to increase the demand for safe haven assets such as gold, especially given the poor state of the global economy.

“Resurfacing trade uncertainty can augment demand for safe investments, especially when the global economy is already in recession. Central banks pumping in liquidity and governments running huge fiscal deficits are factors that are good for gold," said Hitesh Jain, lead analyst, institutional equities, YES Securities. “The shaky global growth outlook and central governments printing money to support the economies have supported the rally in gold prices," he added.

In India, gold prices have been range-bound. After surging on Monday, the prices of MCX, June gold futures softened and closed at 45,751 per 10 grams yesterday, and are currently trading at similar levels. However, experts are of the belief that the rally in gold prices will continue over the next one year.

“Considering all fundamentals, like lower long-term rates, central banks net buying of gold, demand for gold exchange traded funds, global economic uncertainty due to the pandemic and shaky equity markets, the prices may touch $1,900- $2,000 from the current $1,700 mark," said Sunilkumar Katke, head, commodity and currency, Axis Securities. “In rupee terms, we may see the prices close to 50,000-52,000 within a year's time," he added.

“We see gold prices moving towards the 2011 high of $1,930 and touching 50,000 per 10 grams in a year," said Jain.

What should you do?

As gold is expected to do well, should you increase your allocation further? Gold is a good asset class to have in your portfolio to provide diversification however experts recommend sticking to a set asset allocation and not going overboard.

“I would not advise on increasing allocations further. But investors need to have around 5-10% exposure to gold. If you don't have that then you can increase exposure but not because prices are expected to rise," said Arnav Pandya, founder Moneyeduschool, a Ahmedabad based financial literacy initiative.

Gold is a safe investment long believed to protect your wealth against factors like market volatility and global events. But going overboard with investing in it just because of good valuations might through your financial plan off track, so tread carefully.

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