Gold is glittering, but is India making the most of it?

With over 6 per cent gain in the past month, gold has once again captured the attention of investors worldwide as its price surged to record highs. In contrast, equity markets, which are also trading near record high levels, have more or less been flat over the past one month.

So, the sheen on gold has gotten brighter. For the year ahead, the prospects for gold look alluring. Federal Reserve’s March policy was on expected lines. Despite red-hot inflation data, Fed chair Jerome Powell and his team hold on to the view that three cuts will happen this year, and the total quantum of it could be up to 75 bps. One basis point is one-hundredth of a percentage point.

The much-anticipated rate cuts are expected to inject further momentum into gold prices. This is because rate cut means easy money which means more inflation and gold is supposed to be inflation hedge.

Should inflation persist above the Federal Reserve’s target of 2 per cent without imminent rate cuts, then too gold is likely to emerge as the favoured haven asset. It is a win-win bet either way.

Other factors to watch

With Fed deciding to hold rates for the time being there is still some time before easy money scenario returns. So, cautiousness, skepticism and uncertainty still lingers and will continue till actual rate cuts start happening. Governments and central banks will continue to buy gold, rather increasingly, till the cloud of uncertainty is blown away.

These ongoing purchases by central banks and governments, alongside the global and local demand-supply dynamics, are immediate influences shaping gold prices in the near term.

According to the World Gold Council, central banks have consistently been net buyers of gold since 2010, amassing over 7,800 tonnes. Over the past two years, net purchases have surpassed 1,000 tonnes annually, suggesting that this pattern is likely to support gold prices after any profit-taking. Central bank of China and central bank of Poland have been the biggest buyers of gold in the world in recent years.

Other factors to consider include sluggish economic growth, geopolitical uncertainties, and forthcoming elections in over 50 countries, all likely to drive investors towards gold this year.

Furthermore, global futures and options (F&O) trade volumes for gold have significantly increased compared to the same period last year. Considering these factors, gold presents a favorable investment opportunity for the next 12-18 months, with an anticipated 8-10 per cent further upside from current levels amidst intermittent volatility.

Asset allocation for investors

Gold has given 12 per cent compounded annual growth over last 20 years; 10.3 per cent CAGR in last 15 years and 7.5 per cent CAGR in last 10 years. So, it is always good to have gold in portfolio. Whether physical gold or Sovereign Gold Bond or ETF, that will be a personal choice.

In India, people prefer physical gold because they look at the asset as ‘storage of wealth’, ‘passing on to next generation’ or ‘emergency recourse’ rather than an investment. Only in last 10-15 years, the mindset has changed in semi-urban and urban population.

Investing in SGBs, Gold FoFs (fund of funds) or gold ETFs (exchange traded funds) are a recent phenomenon and urban and younger generation who are investing more through these avenues whereas the older generation and rural population investing more in physical gold.

As per recent studies, it’s the middle-income class, earning between ₹5 lakh and ₹20 lakh annually, that is the biggest consumer of gold. Other precious metals like silver, platinum or diamond have not been able to give any threat to gold demand.

The recent introduction of Sovereign Gold Bond or SGBs is the easiest way to diversify your portfolio. Investors who hold the bond for the entire term, that is 8 years, are exempted from paying long-term capital gains tax which is why it is being favoured as an investment class.

For a moderately conservative investor, a 5-10 per cent allocation towards gold is ideal and for more conservative ones up to 20 per cent allocation towards gold is recommended.

The author is Shashank Pal, Chief Business Officer, PL Wealth Management

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