Will the Omicron Variant Scare Put the Spotlights Once Again on Gold in 2022?

December 7, 2021 Mutual Fund

Even before the Government of India imposed lockdowns in March 2020, I wrote to you why it made sense to invest in gold during times of the COVID-19 pandemic. At that time, gold was trading at around Rs 42,200 per 10 gram and went all the way up to make a high of Rs 55,000 in August 2020. Thereafter the precious yellow metal retraced to Rs sub-50,000 levels as new cases of COVID-19 receded, the vaccines became available, the inoculation rate went up, and equities scaled to a lifetime high.

But now, with the new Omicron variant (first reported in South Africa) classified by the World Health Organisation (WHO) as ‘variant of concern’ and high risk (since it is 6 times more transmissible than the Delta variant), equities have turned volatile and gold may get the attention.

Let me explain to you why I say so…

So far the Omicron variant, with 50 mutations overall, has spread to over 40 countries, including those with high inoculation rates. The existing vaccines are not offering enough protection against the virulent Omicron variant. Moderna’s CEO, Mr Stephane Bancel, recently said there could be a “material drop” in the effectiveness of its vaccine against the Omicron variant. The Serum Institute of India has taken a cautious stance for now hoping that Covishield might provide protection, but if needed, said a new booster dose specifically targeting Omicron can be launched within 6 months. Bharat Biotech, the manufacturer of Covaxin, is currently studying if their vaccine will hold up against the Omicron variant. Pfizer is the only pharmaceutical company that has publicly stated its existing vaccines may work against the Omicron variant.

A positive thing is that no deaths have been reported so far due to Omicron according to the WHO. Those infected, (for now) are showing mild symptoms. That said, if the tally of infections increases and hospitalisations go up, the government across the world may be left with no option but to resort to restrictions or localised lockdowns to curb the spread of the virus. This, in turn, may weigh heavily down on global economic growth.

The International Monetary Fund (IMF) Chief, Ms Kristalina Georgieva, has already warned of a downgrade in global growth projection. She is of the view that the new variant could “very rapidly dent confidence” and has urged for global cooperation to control the raging COVID-19 pandemic and support the economic recovery.

Similarly, Ms Janet Yellen, the U.S. Treasury Secretary and erstwhile chief of the Fed and Jerome Powell’s predecessor, has expressed that the Omicron variant could exacerbate supply chain problems, depress demand, and slow global economic growth.

Let’s not forget what’s happening in China. The Evergrande episode of China is just the tip of the iceberg. Growth in the Chinese economy was reduced to 4.9% in Q3CY21 as against 7.9% in Q2CY21 on account of energy shortages and the debt overhang on its real estate sector that now accounts for 25%-30% of the economy. If China’s domestic economy fails to take off in 2022, it might turn out to be a negative for the global economy.

Against the backdrop where the virulent Omicron variant may weigh down on global economic growth, major central banks of the world viz. U.S. Federal Reserve, European Central Bank (ECB), Bank of England (BoE), Bank of Japan (BoJ), People’s Bank of China (PBoC), and the Reserve Bank of India (RBI) may not rush in to raise interest rates anytime soon. Particularly in the U.S., the government’s USD 1.2 trillion infrastructure plans might force the Federal Reserve to retain interest rates unchanged near-zero levels for some more time.

However, to tame inflation, which the COVID-19 pandemic has brought along, the bond-buying programme may be tapered. The IMF has advised the U.S. Federal Reserve to tighten the monetary policy faster to contain the inflation risk (the latest data reveals annual inflation in the U.S. has surged to 6.2%). The U.S. Federal Reserve has indicated that it might advance its bond-buying tapering calendar, unfazed by the Omicron variant.

Low-interest rates and helicopter money may once again put the spotlights on gold. If the pandemic continues unabated, gold is likely to exhibit sheen in the calendar year 2022.

In India, there are so far 23 confirmed cases of Omicron as of December 7, 2021. After the assembly and municipal elections in certain states and cities of India, the COVID-19 cases with the new Omicron variant may rise.

Until the efficacy of existing vaccines against the Omicron variant isn’t tested and results known, the risks of disrupted growth and the uncertain business environment would prevail. Uncertainties such as these have a predilection to work in favour of gold.

Graph: Gold has displayed its lustre in the last few years

Data as of December 03, 2021
(Source: MCX, PersonalFN Research)  

Gold in Indian rupee terms has generated 11% compounded annualised returns over the last five years. Ironically, the year 2021 hasn’t been an encouraging year for the precious yellow metal. Gold is down 5% in 2021 so far. Moreover, it has fallen 15% from its all-time high of Rs 55,922 touched on August 07, 2020. Nevertheless, this is an opportunity for you to buy gold at lower prices now. You may not earn double-digit returns from gold in the calendar year 2022, but the looming uncertainty makes a strong case for investing in gold.

You may strategically allocate around 10% to 15% of your entire investment portfolio towards gold. This would be a smart and sensible thing to do. Historically, gold has often rallied in periods of high inflation, high-debt-to-GDP ratio around the world, when stock market volatility intensifies, the interest rates are kept low, and geopolitical uncertainty prevails. This is because, unlike financial assets, gold is a real asset. It means, gold does not carry credit or counterparty risk and is usually supported by these factors.

Gold in your portfolio would serve as a hedge when other asset classes fail to post alluring returns. It would command a store of value in times of economic uncertainties.

The long-term secular uptrend gold has exhibited cannot be side-lined and highlights the importance of owning gold in the portfolio as a diversifier. But remember not to trade or speculate in gold. Invest with a longer investment horizon (of over 5 years), and be ready to assume moderately high risk.

Further, invest in gold the smart way –in the form of Gold ETFs, Gold Savings Funds, and/or Sovereign Gold Bonds-that will help to diversify your investment portfolio.

Happy Investing!

This article first appeared on PersonalFN here