Mumbai: It appears to be a goldilocks scenario for gold – and ignoring its allure could prove costly for savers.
Gold hoarding by emerging market central banks as West Asia remains on the boil adds lustre to this traditional store of value, as does the near certainty of a prolonged pause in US interest rates.
“Investors could increase their allocation to gold from 8-10% to 10-15%, over the next three months, given the positive outlook for gold,” says Tapan Patel, fund manager – commodities at Tata Asset Management.
Gold prices have moved up sharply in recent times and outperformed the Nifty 50 over a 5-year period returning 17.39% against the Nifty’s return of 15.24%. However, it trailed over a 10-year period returning 9.02%, against the Nifty 50 return of 13.3%. Over the last three months, prices rose 19%, while over a year, they rose 22.8%.
Wealth managers point out that there are many reasons for gold to move higher, and believe investors could accumulate it over any dips in the next 3 months. .
US CPI rose 0.3% in April last month after advancing 0.4% in March and February, suggesting that inflation has resumed its downward trend at the start of the second quarter.
“Any flare-up in geopolitical conflicts, fiscal or monetary efforts to support the economy in the run-up to US elections and the just announced slowdown in Fed balance sheet reductions could negatively influence the inflation situation, keeping gold relevant,” says Ghazal Jain, fund manager at Quantum Mutual Fund.
Gold prices will also remain strong due to a flurry of buying by central banks led by China, Turkey and Russia, adds Patel. The invasion of Ukraine led to fears about risks of the US dollar exposure for many countries.
This has led central banks worldwide actively accumulating gold to diversify reserves and reduce dependency on the US dollar.
Retail investors in China, too, are buying gold, increasing demand for the yellow metal.
Before 2020, when the Chinese government came down heavily on real estate, it was one of the most preferred modes of savings for retail investors. With the local property market out of favour, investors have now turned to gold.
“Retail investors could stagger their bets in 3-4 tranches using a buy on dip strategy, instead of buying at one go,”says Anup Bhaiya, managing director, Money Honey Financial Services.
He believes those investors who fall in the high tax bracket could use a mix of sovereign gold bonds and multi asset funds to build this exposure for tax efficiency, while those whose income is not subject to tax could use gold ETFs or gold funds. While some multi asset funds are taxed as equity funds, a few are eligible for capital gains tax with indexation benefit if held for 3 years.
