There are various gold investment products such as Gold ETF, Sovereign Gold Bonds (SGB) which allow you to diversify your investment portfolio.
The price of gold in the international market is set for the highest weekly gain since 2008. Going by various reports, the fear of global recession and the shrinking supply of physical gold because of lockdown across global geographies are probably going to drive the prices higher from the current levels.
The global economy, especially of the developed world including the USA and Europe, is going through turbulent times. As per recent reports, a record number of citizens have filed for unemployment in America. The falling GDP growth not just in the US but across major economies is something not many are disputing. And, in such a recessionary period in the economy, the one asset class most people will want to keep their money in is gold.
The spot price of gold on the MCX platform (as on March 26, 2020) was nearly Rs 41000, while the price in the Futures market for April contract was about Rs 43500. The returns from gold over the last 12 months has been about 28 per cent, while the gold returns over the last 10 years in India are close to 10 per cent.
FE Online in an email interview with Archit Gupta, Founder and CEO, ClearTax, finds answers to the common queries that investors have in these times.
Is it suggested that in times of recession, one should hold investments in gold? Why so?
Most investors generally tend to hold on to their gold investments in times of recession. Initially, when the recession kicks in, investors rush to liquidate their assets across all the asset classes. However, the one dilemma among investors during such crises is to find a suitable avenue to put the money that was liquidated during the downturn. This is where the precious metal comes into play. Gold being a safe-haven asset has no counter-party risk whatsoever and its value is retained during the recession.
Also, gold does not require a business to keep it afloat, such as in the case of stocks due to which it makes a pretty good reason to hold on gold investments during an economic turndown.
With US interest rates moving down to zero, what impact does it have on gold prices in India?
Low US interest rates generally have a bullish impact on the gold market. When the central bank lowers the interest rates, there is an increase in the outflow of investment capital in the market. This makes stocks, bonds and other money market instruments less attractive to investors. The US interest rates and gold prices generally have a negative correlation. The higher the interest rates, the lower gold prices would fall and vice versa.
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Inflation in India is coming down. Should one still invest in gold?
Gold investments have traditionally been a hedge against inflation. Since the value of the currency tends to drop during inflationary conditions, investors tend to hold on their money in the form of gold investments. Gold is a safe-haven asset whose value is generally pushed higher during such conditions. Though inflation is coming down at present, gold is still considered a good investment, and it is advised to allocate a certain portion of your portfolio to protect against volatility.
How much of one’s portfolio should be there in gold and which gold products should be bought by retail investors?
Investors are mostly advised to limit their gold investments to 5-10 per cent of their portfolio. However, you can consider increasing your portfolio allocation depending on your risk tolerance and comfortability. There are various gold investments products such as Gold exchange-traded funds (ETF), Sovereign Gold Bonds (SGB) among others which can allow you to diversify your investment portfolio.