At a time when relentless selling by foreign portfolio investors and spiralling inflation have led to volatility in the equity markets, and bond yields are rising due to a turn in the interest rate cycle, even gold prices are seesawing. Considered as a hedge against inflation and economic uncertainties, the domestic price of the precious metal has fallen to Rs 51,000 per 10 grams from the April peak of Rs 53,500 per 10 grams.
Even international gold prices closed at $1837 per troy ounce in May, 3% lower as compared with April as the US Federal Reserve’s monetary tightening gathered pace. In fact, the Fed’s aggressive stance has put upward pressure on the US dollar as the dollar index strengthened to 105 during the month, the highest since 2002.
Ravindra Rao, vice president and head, Commodity Research, Kotak Securities, says gold’s rise earlier this year was on the back of a shift out of equities, increased geopolitical risks and persisting inflation concerns, and this also attracted ETF investors. “However, as gold lost momentum near $2000 per troy ounce level, some investors chose to exit. As price fell below the key $1800 per troy ounce level, we saw some buying interest emerging; however, this waned again,” he says.
Chirag Mehta, CIO, Quantum AMC, says gold looks better placed fundamentally given that sustained supply shock inflation will act as a tailwind on gold prices. “Additionally, any escalation in the Russia-Ukraine war will reignite risk-aversion, creating demand for the yellow metal,” he says.
Returns from gold
In the domestic market, gold has given a return of 6% (MCX gold) this calendar year compared to the Nifty index’s fall of 4.5%. In 2021, while gold gave a negative return of 4%, Nifty gave returns of 24%. The positive returns on gold in the domestic market in 2022 is because of the 4% depreciation of the rupee against the US dollar.
Mehta says gold prices may remain range-bound for the next few months as investors gauge the impact of policy on economic growth. “With RBI expected to increase rates in June and beyond, volatility in stock and debt markets will persist. Therefore , allocating some part of the portfolio to gold can help investors tide through macroeconomic and geo-political uncertainties,” he says .
What should investors do?
Typically when equity markets are volatile, the lure for gold increases. A drop in gold prices is a good opportunity to buy the metal. As a portfolio diversifier, investors must allocate 10-15% of the total portfolio to the metal. Retail investors should invest in gold exchange traded funds or sovereign gold bonds (SGBs). Gold ETFs are open-ended funds and the returns are benchmarked on the real returns on investment in physical gold, subject to tracking errors.
In fact, in the month of April gold ETFs received net inflows of Rs 1,100 crore, the highest monthly net inflow into the category after February 2020 when it received net inflow of Rs 1,483 crore. During FY22, the folio numbers in gold ETFs surged from 13 lakh in March 2021 to 42 lakh in March 2022, an increase of 3.2 times. Investors can buy gold ETF for as low as Rs 50 and the buy or sell can be executed at any time during the trading hours on the exchanges.
Similarly, SGBs pay an annual interest rate of 2.5% payable semi-annually and are tax efficient because there is no capital gains tax if held till maturity. The tenor of SGB is eight years and the buyer will have an exit option from the fifth year which can be exercised on the interest payment days.