Gold falls below Rs 48000 giving negative returns over 10-years: What to expect in 2022 and should you invest for the long term?

As the world learns to live with Covid-19, gold prices in 2022 will be influenced by how inflation shapes up and central banks’ reaction to it.

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It is a good time to accumulate gold at the current levels, especially with the risk of the third wave of the pandemic on the horizon, which could place speed breakers on the path of the global economic recovery.

Gold price in India falls below Rs 48000 per ten gram, on the back of weak global cues. The returns from the yellow metal, which is considered to be a hedge against inflation, have remained lackluster for a long time now.

In fact, gold generated a return of almost zero per cent in 2021 and even over the last decade the return in gold translated into a CAGR of about 5.25 per cent.

Interestingly, gold has always been considered to be a hedge against inflation. With annual inflation running around 5-7 per cent, the return in gold as an asset class has been almost negative. “The biggest risk in investing gold is not being able to beat inflation and in that sense it is true that gold has underperformed and given marginally negative real returns. When compared with equity and equity-oriented avenues, gold has certainly given much lower returns over the last decade,” says Rishad Manekia, Founder and MD, Kairos Capital.

Over the last 10-years, below are the returns generated by gold in each calendar year:

Year – Gold Price : Calendar Year Return

2021 – $1,798.89 : -3.51%
2020 – $1,773.73 : 24.43%
2019 – $1,393.34 : 18.83%
2018 – $1,268.93 : -1.15%
2017 – $1,260.39 : 12.57%
2016 – $1,251.92 : 8.63%
2015 – $1,158.86 : -11.59%
2014 – $1,266.06 : -0.19%
2013 – $1,409.51 : -27.79%
2012 – $1,668.86 : 5.68%
2011 – $1,573.16 : 11.65%

The gold price in India in December 2011 was about Rs 30000 while in December 2021, the price of 10 gram gold was around Rs 50000. In dollar terms, the 10-year return has been about 1.84 per cent as gold moved from about $1500 in December 2011 to $1800 in December 2021.

So, what should investors do in 2022 and will gold rally in the years ahead? Let us see what factors could play out in 2022 to help gold regain its lost shine.

Buying Gold in 2022

In times of rising inflation, gold is expected to perform well amongst various asset classes. 2022 is expected to witness more bouts of inflation, something which was talked about as transitory in 2021. “Policymakers entered 2021, proclaiming that inflation would be transitory. They thought as suppliers and consumers returned to normal following the pandemic, inflation would subside. It has not. Policymakers have recently been forced to acknowledge their surprise with the persistence and extent of inflation. This dynamic could offer support to gold prices in 2022,” says Ashraf Rizvi, Founder & CEO, Gilded

With rising inflation, there is expectation of interest rate hike on the cards as well which may put brakes on any upside on the gold prices. “As the world learns to live with Covid-19, gold prices in 2022 will be influenced by how inflation shapes up and central banks’ reaction to it. The persistence of higher inflation could boost the demand for the yellow metal, but it also increases the odds of a more hawkish Fed, hurting prices,” says Chirag Mehta, Sr. Fund Manager-Alternative Investments, Quantum Mutual Fund.

Surprise factor at play

More than sticking to predictions, it’s better to have a plan in place that is able to withstand any surprises. “Severe market swings have led the Fed to change course before, like in 2018 when it paused after raising rates and went on to cut rates in the following year fretting about the risks of a recession. Thus, as it prioritizes financial stability, it won’t be surprising if the Fed is forced to take a U-turn again. But in that case, it will risk inflation getting out of hand and gold will return to strengthening on the back of inflationary pressures and low real rates,” adds Mehta.

What to do

With uncertainty all around, holding gold as a portfolio diversifier is still recommended by industry experts. “With talk of Fed tapering in the air and the dollar index gaining strength, the yellow metal may appear to have lost its luster in the current scenario, but with sticky inflation poking the global markets, it is recommended that investors keep a 5% -7% allocation in gold as an inflation hedge and to provide stability to the portfolio in the event of a sudden rise in volatility. It is a good time to accumulate gold at the current levels, especially with the risk of the third wave of the pandemic on the horizon, which could place speed breakers on the path of the global economic recovery,” says Abhijit Bhave, CEO, Fisdom Private Wealth. “In times such as Global recession, pandemic, geopolitical tensions and so on Gold proved resilient to portfolio,” adds Manekia.

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