Why physical gold is a safe bet against Covid-19 pandemic

Dubai - Investors are at their wit’s end about how to go about multiplying their funds and which are safe haven assets to put their hard-earned savings.

Indian stock markets’ bull run belies the declaration of the world’s sixth-largest economy amid the raging Covid-19 pandemic that has been wreaking havoc for the second year in row.

Investors are at their wit’s end about how to go about multiplying their funds and which are safe haven assets to put their hard-earned savings.

Chetan Parikh, a co-promoter of the Jasmine India Fund, a Mauritius-based fund, and Jeetay Investments Private Limited, an India-based regulated portfolio management firm, weighed in how on Covid-19 has been a catalyst to prevailing trends like digitisation and automation and what are the best investment picks.

“The earnings power of many companies is understated in their reported numbers because of supply bottlenecks and reduced capacity utilisation. The competitive intensity in the Indian economy has reduced due to cash flow issues with the smaller players. Greater consolidation of market shares should translate into higher future profitability,” Parikh, who holds a degree in master’s in business administration from the Wharton School of Business, told Khaleej Times.

He is of the opinion that an investor must back gold and not gold exchange-traded funds (ETFs) or gold bonds.

“One of the primary reasons for buying physical gold is to hedge systemic risks in the financial markets given enormous leverage and record levels of liquidity injections. Physical gold kept with a non-bank custodian has relatively lower counterparty risks. These risks only become evident in a financial crisis. Gold ETFs, being part of the capital markets ecosystem, do not serve that purpose,” said Parikh, who spends most of his time in Dubai and travels occasionally to Mumbai.

He sounded a cautionary tale about an investor’s bid to diversify portfolios and be bullish about precious metals.

“The future is unknown and unknowable. Making consistent forecasts about the future is a myth. Diversification into uncorrelated asset classes can make a portfolio ‘antifragile’. Equities are slaves to earnings power and whilst in the long term, earnings power usually increases, in the short term, valuations to a great extent are driven by market psychology. Given the global debasement of fiat currencies, geopolitical tug-of-wars, large systemic risk and limited supply of gold, there is a bullish case for gold. Diversified investment portfolios containing equities and some gold investments are resilient,” he added.

Mid-cap companies, according to Parikh, are an investment option.

“Mid-cap companies, as a group, have both a higher return profile and higher volatility compared to larger companies. But, as with all investing, stock selection and entry valuations are important. The quality of management and the strength of the entry barriers become increasingly important as the size of the company being analysed decreases. In mid to late-stage bull markets, small-and mid-cap companies, usually, outperform large-cap companies. The flip side is that in corrective phases and bear markets, they fall considerably more than large-cap companies,” he said.

Fintech is certainly the flavour of the season.

“Fintech or rather techfin companies is the direction in which financial services and the banking industry is evolving. The consumers of the coming decades are digital natives. Legacy banking, with its outdated systems, is being reimagined. Banking will become contextual and driven by technology which itself is being shaped by artificial intelligence, the Internet of Things and high-speed bandwidth. To be able to navigate changes in which branches and legacy systems become redundant, requires a mindset and a very different culture from that prevalent across many banks, both in the public and private sector, today. The Indian economy is gaining momentum and with rising incomes, the market potential is huge. However, a decade from now, banking will be a different ballgame. Huge opportunities may abound, but also massive disruptions lie ahead,” he said. And AI-driven companies have captured investors’ attention.

“The confluence of a whole bunch of new technologies, which is shaping the next wave of innovations, be it cloud, quantum computing and mixed reality amongst others. Today the valuations are being driven by platform companies that benefit from network effects, scale and switching costs which lead to operating leverage as monetisation opportunities arise. The algorithms that drive these opportunities get better with machine learning and AI,” he added.

— joydeep@khaleejtimes.com