By Chirag Mehta Gold seems to have been the biggest beneficiary as the world leans towards negative yields, which signal that global central banks are worried and are increasingly losing their grips on the global economy. Escalating and a more widespread global financial uncertainty led to risk-off sentiments across asset markets, driving investors to gold. The turmoil in global markets led to diminishing expectations of rate increases in interest rates in the US, which was broadly supported by the Fed communique aiding the advancement in gold markets. Gold prices ended the month with a 10.78 per cent leap for the month taking this year’s gains to 16.71 per cent. There was a high level of uncertainty surrounding the global economy, which reflected in the fragility of the financial markets. With the slowdown in Chinese growth, there was high speculation over the Chinese currency, as many predicted a sizable one-off depreciation in the currency. However, nothing has materialised so far and with lack of policy guidance, it remains confusing at best. There were also risks surrounding European credit markets. There seemed to be a looming risk of deteriorating geopolitical situation in West Asia. Amid all the ambiguity surrounding the economic landscape and increasing policy consensus of negative yields as a sign of desperation to ignite growth, it was not surprising to see a rush to gold. Although, mixed views surrounding interest rates increases in the US prevailed, it’s clearly tilting towards a moderation of the tightening cycle. There are optimists who point at rising core inflation and strong job creation data for more rate hikes; may be 2 rate hikes for 2016. On the other hand, others cited slowing global growth momentum, rising risk of US credit- default cycle, and increasing likelihood of a large one-off yuan devaluation that would force the US Fed to relent from the path of tightening. Minutes from policy makers’ January meeting signalled that they might cut forecasts for growth and inflation. Even Yellen’s comments that she would not discount negative interest rates completely conveyed a dovish undertone. While traders at the start of January were almost certain that US rates would increase again this year, they now see just about a 65 per cent chance of that happening. Further, the hikes, if at all, may come towards the end of year maybe reflecting the probability that rate hikes will happen post the elections. This decline in expectations was well reflected in the rising bets in gold. Outlook There has been a clear deceleration of expectations surrounding rate increases in the US markets, which signal just one rate hike this year and the most optimists now expect about two rate hikes at the most. This is in stark contrast to Fed expectations for four rate hikes in 2016. Given the US Fed communique, it looks highly probable that the Fed would communicate a reduction in their expectations to may be two rate hikes. Core inflation readings for the US came in at 2.2 per cent higher than their target of 2 per cent inflation. This, combined with lower rate expectations, reflects the fact that the Fed will stay behind the curve and keep real rates negative for longer. Markets will continue to assess and re-assess the length of the tightening cycle creating volatility in gold and other asset markets. On the other end, the fragile economic recovery will witness further strain as the Fed embarks on its necessary monetary policy normalisation. Unfortunately, the US economy is now rife with speculative activities and mal-investments that could cause a downturn by any further attempts by the Fed to further ‘normalise’ its monetary policy. The potential for underlying weak economic growth is simply another factor that could keep a bid in place for gold. Global central banks have fewer options and have become less potent and effective in their ability to reach their current goals of boosting economic activity and inflation. In a desperate attempt to lift off demand, they have pulled the rabbit from their respective hats in the form of negative rates. With about a quarter of the world economy facing negative rates in some form and growth faltering, negative rates are becoming commonplace. Suppressing interest rates doesn’t work either, because all that happens is demand is made to shift from current to deferred consumption, introducing distortions into the economy that might look like a positive result. Also, negative interest rates convey to the public that central banks are worried about the economy and thereby make them more reluctant to spend more money. In addition to lowering returns on savings, they will make consumer sentiment worse. People may resort to hoarding cash rather than yielding negative and also to meet any contingencies arising out of the perceived economic uncertainty. This again will neither lift spending nor investments but has a potential to spark a rush to real assets like gold. Gold has seen a good move up over the last two months. Consolidation is normal and healthy after a move like we saw. Any improvement in risk sentiment may also reduce flows to gold. Fundamentally, gold seems to be on a solid footing as central bankers have again hit the wall. Gold should benefit as central bankers attempt further measures through more newer, unconventional and untested approaches to revive growth. Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk. We anticipate more buying to emerge on any meaningful pull backs supporting prices. To our investors, we always advocate a 10-20% allocation to gold since it is a great tool for portfolio diversification; given these global uncertainties it may be a good idea to have this allocation to gold. Investors are requested to consult with their financial advisors before making any investments. (Chirag Mehta is a Senior Fund Manager- Alternative Investments atQuantum Mutual Fund. He tracks the macros and movement in the yellow metal in this fortnightly column)