Is this the time to increase your allocation in gold-

Is this the time to increase your allocation in gold?

– By Amul Kumar Saha

Gold has been the world’s currency of choice from the time of ancient civilizations to the modern era. Gold is seen as one of the safest investments and as a hedge to help overcome economic inflation. Even as an asset that helps diversify holdings, it is a commodity that has held its value over the long term. Even when the S&P 500 Index was down 56.8 per cent during the 2007–2009 recession, the price of gold rose by 25.5 per cent. In the OND quarter of 2022, the price of gold has risen over 8.5 per cent. Typically, Indians have sentiments associated with gold and see it as a protector against bad times. As 2023 has just begun, it is a good time to reconsider one’s allocation towards gold.

Gold has been physically purchased in the form of jewelry, and coins but with the advent of improved technology, the purchase of digital gold, gold-based funds, and ETFs have picked up pace. Investors understand that during an economic recession when the money loses its purchasing power, the value of gold starts increasing. Rising inflation rates usually strike an increase in gold prices. During negative economic and geopolitical situations, it may be wise to allocate a good portion of the portfolio towards gold.

A Right investment option

It all depends on the resources and investment goals when it is about finding the most suitable gold investment for your portfolio. The price of gold has significantly increased over the past 50 years. It has been reported by Bloomberg that global central banks have been buying the most gold since the U.S. abandoned the gold standard in 1971. This pattern of allocation towards gold by the central banks has further gone up, over the last 3 years.

Investment opportunities in gold include bullion (gold bars), digital gold, mutual funds, futures, mining companies, and jewelry. In terms of volume, India, China, and the United States are large consumers of gold for jewelry. A chunk of demand is attributed to the use of gold in the manufacturing of medical devices like stents and precision electronics like GPS units.

Bullion, futures, and a handful of specialty funds provide direct investment (with a few exceptions) opportunities in gold. Other investments derive part of their value from other sources. If larger investors are fine with paying a premium and storage costs, they may opt to invest in gold bullion. If someone is looking for low-cost exposure with low minimum investments, then digital gold, ETFs and mutual funds that track the price of gold buying jewelry could be a way to own gold. According to a recent consumer data report by AxisMyIndia, Digital Gold is becoming a popular investment choice for consumers in Tier 1 and Tier 2 cities. Gen-Z and millennial investors who prefer investing in smaller amounts are seen adopting MMTC-PAMP’s digital gold which they can easily redeem in the form of gold coins and bars, later on.

The Current Scenario

The Chair of the Federal Reserve of the United States stated that the US central bank would continue to raise interest rates in 2023. Global numbers indicate that while US gold futures stayed unchanged at $1,824.70, the Spot gold was steady at $1,815.00 per ounce. Gold has outperformed the Sensex (up 6.7 per cent) with a year-to-date (YTD) return of 12.6 percent in 2022, raising consumer confidence around India and the United States. 

Despite the global uncertainty around economic development, the rise in precious metal prices was restrained and it supported the US dollar index. However, one has to keep in mind the precarious global scenario owing to the possible resurgence of the COVID-19 virus.

Summing up

There are fair reasons to have an optimistic outlook for gold in 2023 as the demand from central banks rise. At present too, as per the World Gold Council, the year-to-date gold demand from central banks is at 673 tons, surpassing all annual totals since 1967. As anecdotal wisdom commands, this yellow metal will prove true on its nature of being a safe asset in times of turmoil. It is advised to diversify one’s gold holding.

(Amul Kumar Saha is the Chief Digital Officer at MMTC-PAMP)