Traditionally, gold prices rally during the times of high inflation. But going by the trends in the past couple of months, this correlation has broken. The domestic price of the yellow metal is defined by global prices and the rupee exchange rate, and not by the inflation in India. “For Indian investors, gold has now become more of a currency hedge than an inflation hedge,” says Deepak Jasani, Head of Research at HDFC Securities. His advice: Don’t make any tactical change in your gold exposure.
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Invest with caution
During the times of uncertainty and turmoil, for e.g. during the Ukraine crisis, gold investment is still a cushion to fall back upon. Although gold prices have headed south since March, investors still made about 11% in the past one year. “For now, international gold prices will continue to be pulled in different directions as investors struggle to determine which has bigger implications for the metal: high inflation, potential recession, and other geopolitical and economic repercussions of the Ukraine war or higher yields and stronger dollar, thanks to monetary tightening by the Fed,” says Ghazal Jain, Associate Fund Manager – Alternative Investments, Quantum AMC. “Put about 5-10% of your investment portfolio in gold. It can give you returns of 100-150 basis points above the inflation level,” says Harshad Chetanwala, Co-Founder of financial planning and wealth advisory firm MyWealthGrowth.com.
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Opportunity costs
Gold investment appears attractive but one has to be mindful of the fact that the yellow metal has opportunity costs too. “When inflation is high and interest rates are hiked, the opportunity cost of holding gold also goes up,” says V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
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Gold bonds hold the key
Sovereign gold bonds score have an edge over other gold investments as the investor gets an additional 2.5% interest every year over and above the price appreciation of the metal. They also score over gold ETFs as there are no fund management charges. What’s more, there is no capital gains tax if held till maturity. Text by Babar Zaidi/ ET Bureau
