Remain invested in gold rather than waiting for larger correction in prices: Tata Asset Management

Gold

Tapan Patel, Research Analyst – Commodities at Tata Asset Management

Gold is one of the most preferred investments in India for years. People tend to buy gold on auspicious occasions and festivals while in rural India farmers are used to buy gold following good harvesting season. Gold also holds a great value protection against inflation and economic uncertainty. With passing of the times, the forms of investment in gold have been changed. Gold investment now can be done in many forms like buying jewellery, coins, bars, gold exchange-traded funds, gold funds, sovereign gold bond scheme, Digi-Gold etc.

The price performance of gold is linked to overall market cycles and economic events where investors look to hedge their risk exposure with safer asset classes like gold. Gold prices have been on the stellar run recently with domestic gold prices soaring more than 20 percent from the September 2022 lows hitting all-time highs. (Source: Bloomberg).

The current market environment is strongly in favour of gold investment as the global economy is struggling with high inflation and tight liquidity. The major central banks are on the quest to tackle high inflation to bring the economy on track. The US central bank is on the centre stage in this financial turmoil which has hiked key interest rates 9 times so far. (Source: US Federal Reserve)

However, higher interest rates have little impact on inflation which has kept real rates lower. Going forward, an excessive monetary tightening may increase recession risk which is getting factoring in gold prices. The weaker dollar on the lack of improved economic data and de-dollarization in the global trade system has been supportive of gold prices. Hence, the market may expect inflows towards Gold ETFs and central bank gold buying in the coming months. This may add to the overall strong demand from China gold imports and Indian consumer demand.

The current market environment and the auspicious occasion may be considered as an opportunity to remain invested in Gold rather than waiting for larger correction in the prices. We may expect gold prices to remain elevated in the coming months.

Investors may look for various investment themes for investing in gold that are currently available in the market. Apart from physical gold investment, Investors may also explore the following instruments to invest in gold while short-term traders may consider exchange-traded derivatives products.

Here is some understanding of the prominent gold investment themes over traditional gold investment:

Gold ETFs:

Gold Exchange Traded Funds are units representing physical gold which may be in paper or dematerialised form. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments. Gold ETFs are listed and traded on the National Stock Exchange of India and Bombay Stock Exchange (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and can be bought and sold continuously at market prices. (Source: AMFI)

Mutual Funds

The various asset management companies (AMCs) are now offering an opportunity to invest in gold through hybrid multi-asset schemes. Many schemes follow a fund-of-fund structure and primarily invest in Gold ETFs while few offer investment through ETCD (exchange-traded commodity derivatives).

Sovereign Gold Bonds

SGB are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. The Bonds bear interest at the rate of 2.50 percent (fixed rate) per annum on the amount of initial investment. (Source: RBI)

Digital Gold

Digital gold is a mode of buying and selling gold digitally, without having to store it physically. The return on this investment is determined by the market price of physical gold, and digital gold is 100 percent pure, stored safely, and fully insured.

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