Buy gold in a staggered manner – Commodities News

As gold prices have hit a record high of Rs 73,000 per 10 grams this week, retail investors should bet on the metal in a staggered manner. The metal has emerged as the best performing asset class this year and will continue to attract investment as a hedge against rising geopolitical uncertainty, say experts.

Gold prices have risen 16% in rupee terms since January this year as compared with less than 1% for Sensex. Globally, the prices of the metal have risen led by the conflict in West Asia, volatility in the equity market and aggressive buying by central banks of China, India and Russia. The price of gold is inversely related to bond yields and any weakening in yields will continue to have a positive impact on the price of gold.

Ghazal Jain, fund manager, Quantum AMC, says while a 10-15% strategic allocation to gold is ideal, given the run up in prices, some profit-taking can be considered to rebalance portfolio allocations. “Given the recent run up in prices, some pullback in prices is possible which can be good opportunities to build allocation and benefit from gold’s favourable mid-term outlook.”

Gold outlook

Gold could also see further meaningful appreciation if the Fed is forced to ease in response to growth setbacks in the US, or if the geopolitical situation deteriorates further. Experts say the markets seem to be pricing in rate cuts in the US given the conundrum the Fed finds itself such as sticky inflation and snowballing US government debt.  

On the other hand, if the Fed doesn’t meet market expectations in terms of quantum or timing of rate cuts, gold could see some consolidation with downside being limited by fundamentals of peak interest rates, geopolitical conflicts, and central bank gold buying.

Investing in gold is a time-tested portfolio diversifier and is an ideal store of value in the long-term. A recent report by Axis Securities says that given the current macroeconomic developments, gold will remain a preferred asset class and will continue to attract investment as a proven hedge against other asset classes. It recommends that investors should adopt a ‘buy-on-dips’ strategy.

How to invest in gold

Individuals can invest in the metal through sovereign gold bonds. They can invest in bonds at the time of primary issuance or from the secondary market if they are available at a discount. As there are few buyers for these bonds in the secondary market, some sellers offer the bonds at a lower price.

Investing in Sovereign Gold Bonds (SGBs) has several advantages. Investors get a fixed interest rate of 2.5% per annum, disbursed semi-annually. This translates to an effective interest rate of 1.25% for each payment, subject to taxation according to the investor’s income tax bracket. The government guarantee on the principal investment provides security for SGBs. The holding period of SGBs is eight  years. However, investors can sell them after five years.