Indians love to buy gold, especially on Akshaya Tritiya. Now, gold exchange-traded funds (ETF) and sovereign gold bonds issued by the Reserve Bank of India are attractive modes of investing, as the payoff is in line with movements in gold prices. In the backdrop of the raging COVID-19 pandemic and economic slowdown, investors can buy gold as part of their overall asset allocation through these instruments rather than as jewellery, especially as shops may be shut due to lockdowns.
Demand for gold is back
In the first round of lockdown in 2020, gold mines were shut and recycling was also hit. That pulled down the supply for gold. But at the same time, gold demand also decreased, as jewellery shops too were closed. But later, investment demand drove the prices in the first half of CY2020. However, in the second half, the investment demand in gold declined. Gold prices marked a low of Rs 44,106 per 10 gram on March 31, 2021.
In recent months, economies around the world have slowly opened up. India imported 321 tonnes of gold in the quarter ended March 2021, up from 124 tonnes a year ago. Investors are slowly accumulating gold. For example, gold ETFs saw net inflows of Rs 662 crore and Rs 680 core in March and April 2021, respectively.
An inflation hedge
Commodity prices led inflation is seen across the world. For example, the Reserve Bank of India expects inflation to stay above 5 percent in the near future. “Given the monetary stimulus globally, inflation is likely to rise on account of higher prices of agriculture produce and commodities,” says Chintan Haria, Head Products & Strategy, ICICI Prudential AMC.
When inflation is high and interest rates do not move in line with it, investors generally get negative real returns (nominal interest rate minus rate of inflation), which erodes their purchasing power. Gold can help protect your portfolio against such erosion. Investors may allocate more to gold in the future.
“Given the rise in the prices of commodities across the board, there might be a sudden upswing in the gold & silver segments, which have largely missed out on the commodity rally,” says Mohit Nigam, Head-PMS, Hem Securities.
Supportive fundamentals for gold prices
There are economic and political factors at play for gold’s rally.
“Rising Coronavirus cases, continuous liquidity injections, rising inflationary expectations, economies growing on the back of debt, Middle-East tensions, trade war between US and China and other factors continue to boost the sentiment and build a strong case for higher gold prices,” says Navneet Damani, Head Research-Commodities and Currencies, Motilal Oswal Financial Services.
Fiat currencies losing value can also help gold prices. “Gold's competitor, the dollar, will be under pressure going forward as all the pandemic relief measures debase the dollar and add to the massive debt levels of the US,” wrote Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum AMC in his recent gold outlook note. India’s growth expectations are tempered in light of the second wave of COVID-19. As foreign investors trim their allocations to India, the rupee restarts falling against the greenback. This too should be supportive of gold prices in India.
Be realistic about returns
A few investors may think that a repeat of last year’s run is on the cards. However, it may not be the case. As mentioned earlier, the situation has changed a lot. Gold prices may not necessarily move in one direction.
“Watch the movements in alternative asset classes like digital currencies, US yields & equity markets, as these factors can potentially dent gold’s rally to some extent,” says Nigam. He recommends accumulating gold on dips instead of buying it in a single shot.
Be realistic about the price targets. “Gold in the near term should touch Rs 50000 per 10 gram and eventually hit a new high of Rs 56,500 or higher over the next 12 to 15 months,” says Damani.
Asset allocation, the key
If you wish to invest in gold, do not overlook your asset allocation. “An investor should aim to have around 10 percent of the portfolio allocation to gold as it acts as a hedge against inflation,” says Haria.
You can achieve this allocation to gold by investing in units of gold ETFs or sovereign gold bonds (SGB). Currently, you can buy them from the exchanges. The details of the fresh series of SGB issuances
for this fiscal were released on Wednesday. While buying SGBs and gold ETFs from the exchanges, do check for availability of liquidity. If you are keen on liquidity, you may also consider investing in a gold saving fund which assures liquidity, but comes at an extra cost.