Buy gold on dips in the short term as a hedge against rising prices

Amid a global surge in inflation and rising crude oil prices, markets expect central banks to hike interest rates sooner than expected

As Covid cases started reducing after the second wave, people began investing in riskier assets. As a result, gold prices corrected from the peak in August 2020. But now, anticipating high and sustained inflation, some investors are once again betting on the yellow metal, which has traditionally served as a good hedge against rising prices. Sameer Kaul, Managing Director & CEO, TrustPlutus Wealth (India), says, "Gold has had a tepid run since last year. There were some headwinds against gold price appreciation, especially due to lack of fear (risk-off sentiment) and the runaway rally in global equities and fixed income." After being range bound with a negative bias over the past one year, gold prices are up by about 5 per cent since the beginning of November 2021.

Key demand drivers

Two major reasons for the rally in the metal are the rebound in festive demand in India around Dussehra and Diwali and a multi-decade high inflation in the US. Naveen Mathur, Director-Commodities and Currencies, Anand Rathi Shares and Stock Brokers, says, “From last year's all-time high price of Rs 56,191 per 10 grams (August 2020), the yellow metal has fallen significantly to the current levels, motivating retail purchases. Most importantly, due to a smooth vaccination drive, India is now reporting active Covid-19 cases below 15,000 daily. As a result, lockdown restrictions have eased.” 

Combining these reasons, lower prices in the domestic market and fewer restrictions encouraged higher footfalls in jewellery shops during festival times. India’s gold imports in September soared 658 per cent from last year’s lower base, as a correction in local prices to the lowest level in nearly six months prompted jewellers to step up purchases for the upcoming festive season. India imported 91 tonnes of gold in September, compared to 12 tonnes a year earlier.

Mathur says, “Meanwhile, the US has registered a multi-decade high inflation in October at 6.2 per cent--the biggest 12-month jump since 1990. Traders rushed to buy gold as it is considered an inflation hedge, even though the Fed has tabled a schedule to cut pandemic-era stimulus November onwards by $15 billion every month. Hence, the sentiment remained bullish in the first half of November too.”

Some of the main reasons for this trend in gold prices are the spike in inflation globally and rising crude oil prices, giving rose to the market view that central banks will need to hike interest rates sooner than was earlier expected. And the prospect of interest rate hikes could see the dollar rise, and impact gold's appeal.  

Short-long outlook 

Experts are cautiously optimistic about gold. As far as the short-term gold outlook goes, Kaul of TrustPlutus Wealth (India) says, "There is a chance that gold prices may breach $1,900/oz in the near term." Some experts believe that in the short term, gold may decline due to a technical correction to Rs 48,000 per 10 grams but a fourth wave of Covid-19 in the European Union, especially in Germany, the Netherlands and Austria may drive safe-haven investment demand higher.

Raj Deepak Singh, Analyst-Commodities, ICICIdirect, says, “In the short term, we expect gold prices to rally to the Rs 52,000 level as long as it sustains above the Rs 47,000 level, and any dips in the price can be used to accumulate the metal.”

As for the long-term gold outlook, Shravan Sreenivasula, Chartered Financial Analyst (CFA) and Executive Director–Investment Solutions Group, Avendus Wealth Management, says, "Gold is certainly a hedge to the portfolio to the extent of allocation. It has potential to appreciate in value as currencies drop due to fiscal and monetary interventions designed to sooth the markets." In the long term, experts say that their outlook is bullish. Amit Jain, Co-Founder & CEO, Ashika Wealth Advisors, says, "We are directionally bullish on gold in the long run, keeping year 2030 in mind."

Options to choose from

One usually buys gold as a savings product or as an investment. If you are buying it as an investment, make sure it fits into your assets allocation. "The allocation of gold as a portfolio diversifier should be about 5-10 per cent, based on your risk profile," advises Nitin Rao, CEO, InCred Wealth.

Buying gold is easy. The question is whether to buy it in physical form or in paper. Chirag Mehta, Sr Fund Manager- Alternative investments, Quantum Asset Management Company, says, "Physical gold is often marred with impurities and price inefficiencies through markups, and making charges, all of which eat into your returns. Investing in gold is best done in its financial form."

Another option of buying physical gold is via the digital route. Buyers purchase gold in a digital form, and seller partners hold physical gold for every ounce purchased by a customer. You can invest in digital gold anywhere, anytime at live rates. You also don’t have to worry about the purity of gold purchased or its safety. 

Vidit Garg, Director, MyGoldKart, says, "Digital gold investments are kept in a secured vault; hence, they are completely safe and insured. So, you don’t have to worry about any loss or theft of your digital gold. The responsibility of keeping it safe lies with the seller."

Mehta of Quantum Asset Management Company says, "While digital gold offerings meet the purity and liquidity criteria. They fall short on regulation and price efficiency due to high bid-ask spreads." (See Box)

Apart from jewellers, players like Paytm, Mobikwik, and PhonePe also sell gold digitally. Each platform has another seller at its backend.

For paper or digital gold, there are exchange-traded funds (ETFs) and Sovereign Gold Bonds of the Government of India, sold by the Reserve Bank of India. There are also mutual funds (fund of funds) that invest in ETFs or in shares of international gold mining companies.

Rishad Manekia, Founder and Managing Director, Kairos Capital says, "Finvest in Gold is the Sovereign Gold Bonds. What makes it unique is that, apart from value appreciation in physical gold, investors are paid interest by the government at a fixed rate of 2.5 per cent per annum on the investment amount." 

Another advantage of holding it till maturity is exemption from capital gain tax. Sovereign Gold bonds pay an annual interest and are tax efficient, but they suffer from low secondary market liquidity, resulting in price inefficiencies.

Mehta says, "Gold ETFs are backed by 24 carat physical gold and allow investors to invest in gold at low denominations without worrying about purity or storage. These regulated instruments are traded on the exchange at the prevailing market price of physical gold, with no making charges or premiums. Mutual fund investors can invest in a gold ETF via a Gold Savings fund."

Those who want greater safety should stick to SGBs or gold exchange-traded funds (ETFs). Someone with a long investment horizon should consider SGBs.

Those who desire liquidity should opt for gold ETFs, even though they charge an annual expense ratio.

What you must know about regulation of digital gold

• Sebi warned stock exchanges about the inherent risk of digital gold as a product in August
• Both NSE and BSE asked its registered members to abstain from selling digital gold either offline or online as that it was not a security
• In October 2021, Sebi advised all the registered investment advisors (RIAs) to abstain from selling digital gold to customers
• Existing gold products like sovereign gold bonds and gold ETFs are regulated, while digital gold is outside the purview of regulation
• Digital gold may be categorized as a security to bring it under Sebi and could get the same status as equities, bonds and F&O
• An amendment might be introduced in the Union Budget