Should you invest in gold now?

Indian equity markets are near all-time highs. Thanks to overall participation from domestic institutions, retail investors and in recent times even foreign players, indices keep setting new records.

However, recent inflation data from the US has raised concerns about a delay in the Federal Reserve’s interest rate reduction decisions. Rising geopolitical tensions in the Middle East and soaring crude oil prices are other concerns. Heady valuations in some equity market segments and parliamentary election outcomes are other factors at play. 

Given the possibility of heightened volatility, gold – which is also making fresh highs – may be worth considering as an investment option as a part of overall asset allocation and as a hedge against inflation and macroeconomic uncertainties.

Here is more on why you should invest a portion of your portfolio in gold and the ways you can go about investing in the yellow metal.

Gold plating the portfolio

In general, during periods of economic boom, gold has demand in the form of jewellery and even as investments. In downturns, it becomes a safe haven asset and aids in insulating the portfolio from inflation effects. As a store of value, gold could be an important ingredient in your investment holdings for a variety of reasons.

Gold prices and equities move in different directions: In general, the trajectories for the yellow metal and stock indices are different. For example, during periods of heavy equity market correction such as in 2008-2009, 2011 and early 2020, when indices fell 25-51%, gold prices rallied. In fact, gold delivered 27-32% returns in these years. 

Uncorrelated assets help in portfolio diversification: In the course of portfolio construction and asset allocation, diversification becomes important. And diversification is best achieved by investing in assets that are uncorrelated – whose movements do not depend on each other. Data from the last 20 years indicates that the correlation coefficient between the Nifty 50 (or any equity index for that matter) and gold prices is negative. Thus, gold can be a good diversifier as a part of investors’ asset allocation process.

As a hedge against inflation: One of the common traits of gold is that it usually does well to beat the inflation levels. In 9 out of the past 13 calendar years (2012-2023), the domestic MCX gold prices have beaten the corresponding inflation rates for those years. Therefore, gold can definitely help an investor fend off inflation over the long term.

Gains from rupee depreciation: The Indian rupee tends to depreciate against the Dollar, though the trajectory is not linear over the long term. In the last 10 years – April 2014 to April 2024 – the rupee has depreciated against the dollar by 38.64%. Since Indian fund houses buy gold denominated in Dollars, any depreciation of the rupee against the Dollar would aid returns.

Choosing the investment mode

While there is a case for investing in gold, doing so through the right instrument is important. Two of the popular modes of investing in gold are the exchange traded fund (ETF) route and the FoF (fund of fund) option.

ETFs offered by mutual fund houses are ideal low-cost vehicles for investing in gold. Typically, the expense ratio varies from 0.3-0.8%. Investing in gold ETFs requires a demat account. Units are traded in the BSE and NSE and are available with ample liquidity, so buying and selling tends to be smooth. Fund houses invest in the gold of highest purity. Since investors do not have to handle physical gold, there are no concerns about safe storage. Also, one can invest in small amounts. For those without a demat account, there are fund of funds offered by AMCs.

When it comes to performance, Gold ETFs have managed to deliver double-digit returns. The category average returns of Gold ETFs across different timeframes.

Investors can also consider systematic investments in Gold ETFs by buying units every month or at periodic intervals to average costs and generate reasonably healthy returns. Investing 5-10% of your portfolio in gold from an asset allocation perspective tends to work well over the long term. Do consult your financial advisor to decide on the allocation levels.

(The writer is Principal- Investment Strategy, ICICI Prudential AMC)