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Your money: Gold still a worthy investment despite its record-high price

By Shekhar Bhandari

The love and obsession of Indians with gold is legendary. However, in recent times, we seem to be thinking more like genuine investors with the domestic gold prices closely tracking international trends, and not reflecting any undue exuberance. As such, the domestic sentiment seems bullish towards gold in the new year, both from an actual use as well as investment perspective.

From golden age to uncertain times

As the Covid pandemic enguled the world, in August 2020 gold prices rallied to an all-time high of $2,072.85, outclassing its previous record-high of $1,924.77 in 2011. As much of the world recovered from the pandemic and inflation began to bite, in May 2022 real interest rates turned positive, resulting in a flight of money from risky assets to the US dollar. This caused a sell-off in gold, which led to an 18-month low and coincided with a period when the US Fed unleashed a rate hike spree and China was gripped by a Covid wave. But as the inflationary pressures became less threatening, leading to smaller hikes, gold began its recovery journey.

Gold and other precious metals have steadily rallied during the last three weeks, expecting an easier policy tightening for the rest of the year. Since then, the yellow metal has underwent some correction following the Fed’s latest hike which also hinted that a few more hikes are in store. During the past 12 months, gold has also outperformed major indices like S&P 500.

A shiny 2023 ahead?

For 2023, the predictions are more optimistic. Though some of the global uncertainties and weak demand from China will linger on in 2023, gold may witness a sharp rise in value. Gold may also find more demand from central banks who have shown sizeable appetite in 2022. If the world moves rapidly into a recession, gold may still hold a positive impact. If these trends continue, gold can scale the previous highs in 2023.

There is a 10-12% upward rally from the current price points, while in India it could be even more given the potential discouragement of gold imports that may exert pressure on the rupee. In India, gold prices have risen much more over the past year than the international rates because of the rupee’s depreciation. Thus, if the US Fed goes for some more hikes, it would dry up the dollar inflows into India and put further pressure on the rupee from higher commodity prices. In such a scenario, domestic gold prices will benefit. At over Rs 61,000 per 10 gm, accumulating gold with an expected return of 10-12% is still advisable.

Gold still a better asset class

Investors must understand that the long-term stability of gold is indeed its biggest strength and it remains the best hedge against inflation and in volatile market conditions, it can offset riskier investments in your portfolio. While a multi-asset strategy is very important, asset allocation must be based on financial goals, risk tolerance and duration of investment.
For gold, investors may look at gold exchange-traded funds (ETFs) as an alternative to physical gold. These are listed and traded on major exchanges and can be bought and sold continuously at market prices.

Another instrument is the Sovereign Gold Bond that was first issued in November 2015 by the RBI. These bonds, which represent multiples of one gram of gold, earn a fixed interest rate of 2.5% annually along with the capital appreciation, besides ensuring the safety of the gold.

As we progress through these uncertain times, gold must be part of your portfolio to give it that certainty of the real money.

(The writer is president, Global Transaction Banking, Kotak Mahindra Bank)

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