Gold shines as inflation reigns 

Amidst volatile equity markets and peaking interest rates, one asset class that is making fresh highs is gold. As it sustains over ₹60,000 per 10 gm ten gram in the domestic market, going by MCX prices, the yellow metal has once again reinforced that it revels in uncertain markets and, more importantly, it remains a consistent hedge against inflation.

Given that interest rates are at their peak, inflation is still sticky and global economic outlook weak, there may yet be more legs to gold’s rally for the foreseeable future. Investors would do well to have some exposure to gold.

Beats inflation

In six of the years from calendar 2016 to 2022,, in six of the seven calendar years,MCX gold prices have convincingly beaten inflation. While gold’s return in each of the calendar years ranges from -4.2 per cent to 28 per cent, inflation has been in the 3.3 per cent to 6.7 per cent band. Thus, domestic gold prices have risen way ahead of inflation, most times.

If we take the case of gold ETFs , returns have been quite healthy across short and long timeframes — one-, three-, five- and seven years. Gold ETFs, as a category, have delivered more than 9 per cent compounded annually over the past three years, while the five-year returns stand at a robust 13.5 per cent. Even the rolling returns of gold ETFs are quite healthy. If rolling 1-year periods over 2016-2023 are taken, the average returns are 8.1 per cent. When 3-year rolling periods are taken over the same timeline, the average returns are a robust 10 per cent.

While gold ETFs are one of the most convenient ways to take exposure to the precious metal, the recent change in taxation rules for the same takes some sheen off.

Lower post-tax returns, yet….

From April 1, all gains — short- or long-term — from debt-oriented schemes, gold ETFs and global funds would be taxed at the slab applicable to you.

Earlier, the long-term capital gains tax (for holding period of three or more years) was 20 per cent, with indexation benefit. So, for example, a 9 per cent return from a gold ETF and a 6 per cent inflation meant that post-tax returns would still be 8.4 per cent.

However, with the new tax rules, in the example above, the entire gain would be taxed at the slab. For a person in the 30 per cent slab (plus 4 per cent cess), the post-tax returns would be 6.17 per cent, that is, just above the inflation rate.

Of course, gold as an investment must generally not be more than 5-10 per cent of your portfolio. Plus, it is not as if gold prices rally linearly. For example, in for three calendar years of 2013, 2014 and 2015, the metal gold delivered negative returns.

For now, Sovereign Gold Bonds ( SGBs ) may be a more tax-efficient mode for retail investors to take exposure to the yellow metal. There is no capital gains tax for redemption and at maturity for SGBs. There may be a case for gold ETFs as well, for those in the lower-tax brackets.

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