Gold, which emerged as the best-performing asset class this year, is likely to continue to have an edge over the other asset classes in the coming year too. It is seen as the safest instrument as the slowdown risk mounts over the US market given apprehensions of aggressive rate hikes. In India too, domestic gold prices performed better than the international prices supported by the depreciation in the rupee and also hike in levies by the government.
Experts say gold will continue to be a preferred asset class until uncertainties over the Russia-Ukraine war fade away and will attract investments as a proven hedge against other asset classes. “Internationally, we expect prices to move upwards in 2023 as the Federal Reserve might turn less hawkish given the softening inflationary pressures and a slowing economy,” says Chirag Mehta, chief investment officer, Quantum Mutual Fund. “This would put pressure on the US dollar and bond yields, thereby helping gold prices. Moreover, prevailing geo-economic and geo-political uncertainties will also continue to provide a floor to gold prices.”
Also Read: Gold bonds: Two more tranches in FY23
Why invest in gold?
Gold, as an asset, acts as a hedge against inflation as well as an insulation to any global political or economic uncertainties. While over the long term (10-15 years) the metal has provided returns above inflation, it has also gone through extended interim periods of subdued returns.
Manavi Prabhu, head, Fixed Income, Anand Rathi Share and Stock Brokers, says a small allocation to the extent of 10% of the overall portfolio is always good to have. While gold is volatile, if held for a 5-10-year period it delivers 8%-10% of CAGR returns. “For long-term investors the best way to invest in gold is through the sovereign gold bond route,” she says.
Also Read: Gold ETFs witness outflows in November
The metal is a time-tested portfolio diversifier and a store of value in the long term. Therefore, it is wise to stay invested in gold. Mehta says 15-20% allocation to gold helps contain drawdowns from risky assets like equities. “Also, with such portfolio allocation to gold, one does not compromise on overall portfolio returns but minimise risks substantially. Liquid and price efficient products like gold exchange traded funds (ETFs) provide investors with a smart and efficient way to take exposure to gold, one that is backed by real gold,” he says.
Gold bonds, gold ETFs
While gold prices rallied by 4% and 8% in rupee and dollar terms, respectively in November on account of softness in the bond yields, gold ETFs witnessed net outflows of Rs195 crore in November 2022 as investors booked some profits. However, year-to-date net inflows into gold ETFs have been Rs 2,427 crore despite outflows in five out of 11 months. Gold ETFs have delivered 12.3% returns in the last one year as compared with 7% in large-cap funds, 5.3% in equity-linked savings schemes and just 1.42% in long-duration debt funds.
Gold ETFs score over others due to factors like transparency, liquidity and nil storage charges. They are open-ended mutual funds backed by 24-carat physical gold schemes. Investors must have a demat and trading account with a broker to invest in gold ETFs. The returns are benchmarked on the real returns on physical gold, subject to tracking errors. There are no deductions, except for exit load for a particular period holding. Ideally, investment in gold ETFs should be done in a staggered manner.
Sovereign gold bonds (SGB) are gaining popularity as investors earn interest of 2.5% every year. However, they suffer from low secondary market liquidity resulting in price inefficiencies. An investor will have to hold the bonds for eight years and will have an exit option from the fifth year which can be exercised on the interest payment days. The next tranche of SGBs is open for subscription from December 19-23.
While digital gold sold through wallets or non-broking platforms meet the liquidity criteria, they fall short on regulation and price efficiency due to high bid-ask spreads. While investing in gold through the ETF route, investors must be mindful of the tax implications. However, in SGBs the interest income and the capital gains is exempt on maturity which makes it a better option for long-term investors.
GOLD RUSH
- A 15-20% allocation to gold helps contain drawdowns from risky assets like equities
- Gold ETFs have given 12.3% returns in the last one year as compared with 7% in large-cap funds and 5.3% in ELSS
- The metal is seen as an instrument facilitating flight for safety asthe slowdown risk mounts over the US market