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The entire world is battling a serious health issue that has shaken economies across the globe and put our lives at a temporary halt. The novel coronavirus outbreak that began from Hubei province in Wuhan, China ended up as a pandemic spreading and strengthening its grip across different parts of the world.
In order to contain the spread of the novel coronavirus governments and administration across many different countries have declared a state of lockdown. As a result of the lockdown, all major economic activities of these countries have paused which has resulted in the weakening of economies and consumers in terms of finances.
Gold has always been considered a safe mode of investment that helps to attain financial stability during phases of market instability. Gold has the ability to provide a hedge against inflation due to its high liquidity and market value. Gold as an investment is less volatile when compared to other forms of investments such as mutual funds, bonds, stocks, etc.
With global markets and economies almost on the verge of collapsing due to the COVID-19 outbreak, gold is unable to provide the financial stability that it used to offer in the olden times. Back in time gold was considered a safe mode of investment, but the current situation has led to increased uncertainty which has affected gold as well since its market has fallen down substantially.
The prices of gold in the international market typically fluctuated between USD 1600 to 1800, however, the recent outbreak of the novel coronavirus has affected the international market value of gold reducing it to USD 1500 per troy ounce. The dip in the asset class has led to marginal calls which itself is one of the primary reasons for the downfall of prices in recent times.
Contrary to the conventional approach of investing in gold during phases of financial turmoil, investors have depicted a higher inclination towards American Dollars (USD). Moreover, the current rise of USD in the international markets is evidence of the fact that Dollar based assets and securities are more sought by investors during phases of uncertainty and instability.
This current dip in the prices of gold is not new, during the great inflation of 2008 gold prices fell extensively due to high levels of volatility before again stabilizing in 2011. The long-term prospects of gold in comparison to other assets are safe and secure however in the long run the major detrimental factor that will determine the price of gold will be the rate at which the novel coronavirus will spread in the UAE and USA.
The US is one of the worst-hit countries with the COVID-19 outbreak, and due to the sudden rise in the number of cases in the US and UAE, it is most likely that the prices of gold will fall exponentially in the upcoming days.
The downfall and dip will not just be limited to the gold market but various other markets in the UAE and across the world will witness a dip in sales and revenue. Even after considering the fact that the prices of gold will drop the accumulation of gold by governments and consumers across the world is likely to increase exponentially.
With political tension between the United States and China increasing along with factors like the accumulation of gold by central banks of countries and macroeconomic uncertainty will increase the accruing of gold by various governmental and non-governmental bodies.
The best strategy to mitigate financial risks arising due to the COVID-19 outbreak is to create a balanced portfolio that includes a mixture of investment tools. The best combination in this scenario is to include 60% of equity share 30% of debt share and 10% of gold in your investment portfolio to minimize the degree of risk associated with the COVID-19 outbreak.
An important point to be kept into consideration is that the equity market has fallen down substantially during the COVID-19 outbreak which will affect the returns of equity shares as well. However, with a balanced portfolio, the affected returns will be covered by other securities.
Typically, according to experts gold should not constitute more than 10% of a financial portfolio. Instead of adding gold into your financial portfolio in its physical form, it is advisable that investors should look forward to adding gold in digital price based on the gold rate in Abu Dhabi. Digital gold unlike conventional gold is free from the issues that are associated with storing gold in its physical form. Some of the most common examples of digital gold are gold bonds, gold futures, gold exchange traded-funds also known as ETFs.
In a Nutshell
Gold has always been one of the best financial tools that provide a hedge against phases of financial turmoil and instability. However, the COVID-19 outbreak has led to the creation of an exceptional situation where the prices of gold are falling exponentially.
Considering the various detrimental factors gold still has the ability to combat the impacts of inflation due to its high liquidity and market value. Investors should lay emphasis on investing in gold in its digital form rather than a physical form as it offers better returns and comes with lesser risks. The yellow metal has been a financial savior since time immemorial and it continues to do its job even during such an exceptional phase.