Domestic gold prices have been flattish in 2021. What is your outlook on gold prices and your advice to investors on gold exposure for 2022?

Gold shined in 2020 as a result of risk aversion due to the Covid-19 pandemic as well as the coordinated easing of monetary policies and softening of global interest rates. In the first half of 2021, gold consolidated from 2020 highs as successful vaccines and global economic recovery improved investor sentiment but got back in favour in the second half due to the firming of inflation and repeated Covid outbreaks.

Moving into 2022, the stage is set for a hawkish pivot by the US central bank.

But what remains to be seen is how hard the Fed presses the QE brakes. Especially with the background of slowing growth momentum and the Omicron variant.

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Between sticky inflation acting as a tailwind and the Fed’s tightening-induced stronger dollar taking a toll, gold, as a result of conflicting forces, is expected to stay range-bound over the next few months. But long-term gold investors will have the last laugh as a hasty taper could hurt growth and trigger market tantrums, making investors seek portfolio diversifiers like gold. The monetary asset’s price should also ideally catch up with the pandemic era’s elevated global money supply and low real rates, as it has done historically. In the meantime, gold is likely to be in a consolidation mode, making it conducive for investors to accumulate it.

How much support will Indian gold investors have from the currency in 2022?

As the US Fed unwinds its easy-money policies, it will likely keep strengthening the US dollar relative to other currencies, including the rupee. With higher interest rates in the US, Indian markets could witness capital outflows, hurting the rupee. The depreciation in the rupee will support domestic gold prices. But we do not expect a sharp depreciation, given the Reserve Bank of India’s robust foreign exchange reserves, the possibility of a Balance of Payments surplus, the potential for foreign flows, including in the series of IPOs attracting overseas investment in Indian firms, and India’s potential global bond index inclusion in 2022.

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With silver ETFs coming soon, where will it fit in an investor’s portfolio?

Silver prices, because of the metal’s industrial use, have a stronger relationship to economic growth. Thus, silver prices generally tend to move in tandem with equities and are more volatile. In contrast, gold gets a push in times of economic distress when equities tend to suffer. Gold is thus a better and time-tested portfolio diversification asset. We suggest a 10-15 per cent strategic allocation to gold at all times to capitalise on its risk-reducing, return-enhancing characteristics. Investors may opt to take exposure to silver from time to time on a tactical basis after evaluating supply and demand conditions as well as substitution possibilities, etc.

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Earlier, to be able to invest in silver, investors had to choose between the physical form or silver futures. Owning the physical metal is inefficient due to purity concerns and storage costs, while silver futures are complex, risky instruments better suited for sophisticated investors.

Like in the case of Gold ETFs, Silver ETFs too will pass on benefits of price efficiency, liquidity and convenience to retail investors. However, we do not expect a significant shift away from Gold ETFs to Silver ETFs given the Indian preference for gold and its liquidity and portfolio diversification benefits.

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