Investors should maintain 10-15% allocation to gold, say analysts

While inflation and war will provide support, rising interest rates may act as dampener

Gold has been volatile in recent weeks. After a sharp rally in March, after the Russian invasion of Ukraine, its price declined rapidly, falling to a two-month low of around Rs 51,100 per 10 grammes on Wednesday. With Akshaya Tritiya round the corner (May 3), many investors will want to add the yellow metal to their portfolios. Here is the strategy they could follow, given its current uncertain outlook.

Inflation providing tailwind

The biggest tailwind for gold is worldwide inflation, which is likely to be persistent since it is the result of fractured supply chains, worsened by the war. Gold is a proven hedge against inflation.

“Gold tends to perform well in an inflationary environment. One can expect inflation to boost gold prices from time to time, despite a strong dollar,” says Gnanasekar Thiagarajan, director, Commtrendz Research. 

Whether this will be sufficient to take gold past its March 2022 highs remains to be seen, he adds.

Geopolitical tensions

Gold is a must-have asset when the financial markets are volatile. The Russia-Ukraine war is likely to keep markets on the boil.

“The uncertainty looming over the Russian-Ukraine war is likely to provide some cushion to falling gold prices,” says Roshni Nayak, founder, GoalBridge, a Sebi-registered investment advisor.

This war’s positive impact on gold prices could last even after it ends. “Continued fighting and the resulting humanitarian and economic crises are hurting investor sentiment and keeping gold in demand. Even after the conflict ends, we expect gold prices to reflect the risk premium as the geopolitical ripple effects of this war unfold. The economic sanctions against Russia will continue even after the war and will continue to put pressure on global energy and food supply chains, stimulating inflation and keeping gold relevant,” says Chirag Mehta, chief investment officer, Quantum Asset Management Company.

Rising interest rates

However, rising interest rates in the US and India are likely to exert a downward pull on gold prices. The US Federal Reserve (US Fed) has signalled multiple rate hikes this year to control inflation. Other central banks are likely to follow suit.

Experts, however, feel it is by no means certain that central banks will be able to follow up on their intent to hike rates.

“In theory, a hawkish Fed isn’t good news for gold. But while the Fed is currently emboldened by the resilience of the economy and the financial markets, its aggressiveness will be tested by a possible economic slowdown or stock market turbulence,” says Mehta. According to him, any softening in the US Fed’s current aggressive stance will be bullish for gold.

Thigarajan concurs. “Though the Fed has signalled aggressive rate hikes, it has also cautioned that its actions will be based on incoming data. If growth begins to suffer due to rate hikes, it could tone down its hawkishness,” he says.

Adopt asset-allocation approach

Gold prices are likely to be dragged upward and downward in the coming days, making it difficult to predict their direction.

“Gold is likely to be in consolidation mode for some time owing to conflicting forces. Under-allocated investors should use price corrections to accumulate gold and raise their allocation to 10-15 per cent of their portfolio. Those who already have this level of exposure should stay put and not go overboard,” says Mehta.

He emphasised that gold must be present in every portfolio, given its ability to act as a portfolio diversifier, source of liquidity, and preserver of purchasing power.

Nayak, too, believes that there should be a limited exposure. “The sole intent of adding gold to your portfolio should be diversification. It can provide a hedge against economic turmoil. Its minimal correlation with debt and equity helps support the portfolio when these asset classes are not doing well.”

Investors having at least an eight-year horizon should take exposure to gold via sovereign gold bonds. Those who have a shorter horizon should invest via gold exchange-traded funds and mutual funds.