Gold - An Opportunity Amid Crisis – By Sidhavelayutham, CEO & Founder Alice Blue

Bangalore (Karnataka) [India], February 15: Uncertain times have always been a part of everybody’s life. In the recent past, we went through a terrible pandemic, followed by the Russia-Ukraine war that led to a 40-year high inflation rate in the US as well as multi-decade highs in Europe, the UK and other parts of the world. The geopolitical crisis and the sky-high inflationary environment have actually impacted on our investment portfolios too.

In 2022, if you had invested in either equity or even created an FD, you would not have generated more than 6%-6.5% (pre-tax). That’s not even enough to beat the average inflation rate (6.9%) in 2022. If you look closely at the chart below, you will observe that Nifty has given a meagre 3.6% return. In fact, the smallcap or midcap indices have been worse, with smallcap index delivering a -14% return. For FD, the return would not have been more than 6-7% (pre-tax).

However, if you see the dark blue line right at the top, that’s your portfolio saver - GOLD, a great 16% return.

When the Russia-Ukraine war broke out on 24th February last year, gold prices shot up by more than ₹4000 to ₹55400 per 10 gm in mere 8 days. Even during the 2008 financial crisis, gold prices doubled in just a span of 3 years. It is from December onwards that we have started seeing early signs of a similar kind of run-up. In fact, on 24th Jan (Tuesday) itself, gold made an all-time high of ₹57000 per 10 gm, breaking the previous record of ₹56200 (August 2020). You must be wondering why this is happening again. Let’s find out!

China and Russia are planning to remove the dollar as the reserve currency.

According to Swiss customs data, the world’s biggest gold consumer China has started purchasing more and more of the precious metal. China took 524 tonnes of gold in 2022 as compared to 354 tonnes in 2021; that’s a massive 48% jump. China’s gold import from Russia was also more than 67% up in 2022. In fact, Russians also bought a record 57 tons of gold in 2022 from their local banks in comparison to just 6 tons bought in 2021.

Central banks fear a global recession.

The World Gold Council also reported that the central banks around the globe had bought nearly 400 tons of gold in the third quarter of 2022, that’s a 300% rise on a year-on-year basis. Banks, too, want to reduce their dependence on currency reserves and higher allocation towards safer asset classes.

Federal Reserve to slow down on rate hikes.

After a continuous rate hike of 0.75% (4 times) since mid-2022, this could be the second time when the rate hike quantum could be lower. After a 0.5% rate hike in the December policy, it is expected that there could be a 0.25% rate hike in the upcoming Feb policy announcement. This will reduce dollar demand.

It is primarily due to these three reasons that the dollar index has been coming down continuously, and the gold price is shooting up since December.

So, the gold rush is here to stay, and it could even be a structural long-term shift if China and Russia actually end up doing what they have planned. The current geopolitical environment can be a great opportunity for you to invest in gold. From an asset allocation perspective, gold should be at least 10-15% of your investment portfolio. This helps you diversify risk and hedge against uncertain times ahead. In order to eliminate the risk of holding gold in physical form, you can look at buying paper gold. Paper gold can be primarily purchased either as a gold ETF or Sovereign Gold Bond (SGB). Let’s understand each of these instruments.

Gold ETF

Gold ETF has more than a decade-long history in India now. ETF stands for Exchange Traded Funds and gold ETFs are units of gold issued on the exchange by the ETF, which is responsible for holding physical gold against it with a gold custodian bank. You can buy and sell gold ETFs just like a normal share. There is no lock-in requirement here. There are also separate gold mutual funds which invest in gold ETFs.

The popularity of gold ETFs among the investor community has also gone up significantly over time. In 2022, the count of gold ETF investors’ accounts has risen from 32.09 lakhs (2021) to 46.28 lakhs now. Additionally, the net AUM of gold ETFs has shot up by more than 16% to ₹21455 crore in the last 12 months ended December.

Sovereign Gold Bond (SGB)

These are gold bonds issued by the Reserve Bank of India (RBI). Bonds are issued in denominations of one gram of gold and in multiples thereafter. If you invest in this instrument, you get two benefits - the capital appreciation based on gold price movement plus an interest income @2.5% per annum paid semi-annually. SGBs have an 8-year maturity with a premature redemption option after 5 years.

In fact, due to all these advantages, we are experiencing higher traded volumes in gold each financial year and a growing client base every quarter in FY23 so far.

Source: Alice Blue Financial Services Pvt Ltd

Having understood the importance of gold in the ongoing scenario and the edge of investing in gold ETFs or SGBs over physical gold, you are ready to make gold a part of your portfolio. However, before you dive in, do consult for in-depth knowledge about the features of these instruments, including their tax implication and then you can go for GOLD!