Is it the right time to invest in gold?

What is driving the gold prices, and is it the right time to invest in gold?

-U Amareswara Rao, Bapatla

Gold prices have corrected after reaching an all-time high during the coronavirus pandemic. As gold is always considered an ultimate safe-haven during uncertainty and financial crisis, the gold price rose 28 per cent in 2020. Undoubtedly, gold is a less risky asset, one of the most preferred ones by investors during uncertainty and recession. The unprecedented flow of money supply by government stimulus amidst Covid-19 globally triggered sharp buying in the yellow metal in both domestic and global markets in 2020, taking the gold price northwards. Gold prices saw a steep rally during the peak time of the Russia-Ukraine war in 2022. Volatility became the buzzword in 2022 as equity markets were volatile and nosedived most of the time.

The reserve banks or central banks across the globe had to take corrective measures like raising rates to check inflation. The Russia-Ukraine war, high crude oil prices, and the central bank's policy measures put pressure on the Indian rupee. Rupee weakened to an all-time high of Rs 83 against the greenback. This has caused a rise in gold prices. The possibility of a recession in developed economies also made investors nervous and worried. They had to turn towards gold for stability.

After struggling at Rs 50,000 levels in September 2022, gold prices have witnessed a remarkable global rally from the beginning of 2023. The price has touched around Rs. 62,720, a fresh all-time high on 5 April 2023. Currently, gold trades at approximately Rs 62,350 per 10 grams in the domestic market. Why is gold once again taken centre stage? Soaring retail inflation, interest rate hike, volatility in equity markets, job loss woes, unemployment, unreliability, and other unpredictable problems have left investors worried. The precarious situation made people park their money in the safest asset classes, stable places, including gold, and a safe haven. Gold is safer than equities, bonds and currencies trade. Gold, in such uncertain times, has always given decent returns. Investors and central banks across the globe have increasingly sought the yellow metal. Aggressive monetary tightening also results in changes in the prices of gold.

Gold is historically considered among the best hedges for inflation, recession, wars, pandemics, natural calamities and times of financial crisis. The value of gold tends to increase during these times. Hence, many investors have added the shining metal to their investment portfolios as a hedge against inflation. Gold is also an asset that retains its purchasing power without depreciation. The crypto industry came down crashing in 2022 with 90 percent drop in asset prices. Various scams, hacking of exchanges, and fall in the prices of cryptocurrencies led to the crash of the crypto market and crypto asset class. This situation made many investors keep crypto at bay and embrace gold.

Research shows that gold will outshine equities and traditional financial asset classes when the inflation rate surpasses interest rate increases or interest rate drops behind inflation rate increases. Globally, when the dollar's value rises, people sell gold, and when the dollar's value falls, they invest in commodities like gold. Why do the majority of Indians seek out gold? The majority of physical gold in India is imported. Since India imports the majority of its gold, a weak currency increases the landed cost of the commodity, causing a price rise. So, a depreciating rupee may increase the price of gold. On the other hand, the depreciating rupee may also bring down the demand for gold. The gold rate will fall if the rupee appreciates against the dollar, and eventually, the demand for gold will increase.

The glittering gold has returned a lucrative gain to its investors consistently, an average return of 13 per cent in the five years with a whopping 92 per cent growth in gold price. Gold has multiplied investors' money several times and returned nearly 900 per cent since 2001 or the beginning of the 21st century. We may further witness a sharp jump in gold prices. If you are in the age group of 30 to 40, you may allocate 20 per cent of your portfolio to gold, including physical, sovereign gold bonds, gold funds and gold ETFs. It’s better to allocate 5 per cent to physical gold 5 per cent and the remaining 15 per cent to gold funds, gold ETFs and sovereign gold bonds

Sovereign gold bonds also create dual income as these bonds offer an interest income and tax-free capital gains. Gold funds and gold ETFs are very easy and convenient to buy and sell or trade. On the other hand, sovereign gold bonds will mature only after eight years of investing. You may take the SIP route for both gold funds and gold ETFs.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV)