Explained: Gold loses some lustre, should you invest in it?

Jump in gold imports

This May, India imported gold worth $5.8 billion, as against $677 million in the same month last year. These numbers for June 2022 and 2021 were $2.6 billion and $969 million respectively. Gold imports have risen in line with the rising global uncertainty, spike in inflation, volatility in currency, and the under-performance of equity markets.

The fact that gold preserves its value in the long run and generates above-inflation return is one of the main reasons why investors gravitate towards gold in times of high inflation. While commodities do have cyclical risks, experts say gold will generate a positive return in the long run simply because it’s a precious metal whose supply is limited.

Rising geopolitical concerns on account of the war in Ukraine that has hit the supplies of crude and several key agri commodities has also emerged as a reason for the rise in demand for gold. Another factor is the high liquidity of gold, and the under-performance of equities over the last nine months. While equity markets have a negative correlation with inflation, gold has a positive correlation, and tends to preserve its value in an inflationary environment. Since gold also has a low correlation with equity, it provides stability to the portfolio.

Gold prices outlook

Even as demand in India has risen, international gold prices have declined, having fallen more than 12 per cent over the last three months. Gold is currently trading at around $1,720 per ounce.

There could be fresh pressure on the price of gold, as data from the US Bureau of Labor Statistics on Wednesday showed consumer price inflation at a new 40-year high of 9.1 per cent in June. This is likely to nudge the Federal Reserve to raise rates by at least 75 basis points in its next monetary policy meeting later this month, which may put further pressure on gold, and also impact emerging markets and their currencies.

A rise in US interest rates will further strengthen the dollar as money moves into the US chasing higher interest rates, and will in turn raise the opportunity cost of holding gold for investors. Besides, a strengthening of the dollar vis-à-vis other currencies increases the cost of gold purchase in those currencies, which may not be suitable for short-term investors.

“The international price of gold has been on a decline because of monetary tightening by central banks. With the spike in inflation in the US and expectations of further increases in interest rates, the dollar has emerged as the safest haven for investors — which is a negative for gold. While we don’t expect a major sell-off, prices are likely to remain weak for the next year or even longer,” Hareesh V Nair, head of commodity research at Geojit Financial Services, said.

Ravindra Rao, head of commodity research at Kotak Securities, said, “Gold bounced back after taking support near $1700/oz level and is supported by increased demand as an inflation hedge; however, general bias may remain on the downside unless we see a substantial correction in the US dollar index or substantial recovery in commodities at large.”

Performance this year

While other asset classes like equity markets faced rough weather, gold did not disappoint investors. Gold’s flat year-till-date performance may seem dull at first glance, but it was still one of the best performing assets during the first half (Jan-June) of 2022. It not only delivered positive returns, it did so with below-average volatility.

Gold (24 carat) which was quoted at Rs 4,985 per gram on January 1, 2022, closed slightly subdued at Rs 4,917/ g on June 30. The benchmark Sensex by contrast, fell 10.41 per cent (6,100 points) during the first six months.

“Gold has actively helped investors mitigate losses during this volatile period. Especially considering that both equities and bonds, which usually make up the largest portion of investors’ portfolios, posted negative returns during the period,” the World Gold Council said.

What should you do?

Prices are likely to remain weak for a year or more, and experts say investors should keep investing in gold as per their asset allocation, and buy on dips for the long term.

Investors should go for exchange traded funds (ETFs) or sovereign gold bonds as the preferred mode of investment, Nair said. Experts are of the opinion that if gold is not purchased for consumption in the form of jewellery, the investment should be in paper form.

While Gold ETFs are open-ended funds that allow one to invest in gold without physically holding it, many prefer sovereign gold bonds, as they bear interest at a fixed rate of 2.50% per annum on the amount of initial investment, which is credited semi-annually.

Bonds are sold through offices or branches of nationalised banks, private banks, foreign banks, and designated post offices. Financial planners say gold should form 5-10 per cent of the overall portfolio.