6 MinsAug 26, 2022
Most Indians have traditionally invested in gold. It is considered to be an asset that can be passed on to the next generation, a store of value and a mark of wealth. If you are considering buying gold, Ganesh Chaturthi is an auspicious occasion.
Lord Ganesha or Ganapati, as you may know, is also known as the Lord of prosperity and wealth.
There are five good reasons why you should buy gold this Ganesh Chaturthi:
(1) Inflation
The cost of living or inflation has been on the rise of late. The spill-over from geopolitical shocks, the appreciation in the U.S. Dollar (causing imported inflation), the supply chain disruptions, elevated
prices of metals, increase in the price of cooking gas, certain food items becoming dearer, as well as the cost pressures from output prices across the manufacturing and services sectors, are some of the key factors that pose a risk to the
inflation trajectory. In 2022, inflation in India (and many other parts of the world), is expected to remain elevated.
According to a study by the World Gold Council, gold has performed better when inflation is high (increasing by 12%
on average when inflation rose above 6%), thus proving to be a hedge against inflation.
Moreover, a significant proportion of gold demand is driven by consumers, which too has had an impact on the price of gold. A 1% rise in inflation,
leads to a 2.6% short-term demand for gold, reveals the WGC study.
(2) Rising interest rates
Usually, interest rate hikes by major central banks to tame inflation, are a headwind for gold. That said, after front-loading rates in the earlier half of 2022, most central banks, while keeping
a hawkish stance, are likely to hike rates slower going forward and be supportive of growth concerns. For any meaningful detrimental impact on gold, the U.S. real rate needs to be over 2.5%, while currently it is sub-zero.
(3) Bonds yields under pressure
While the 10-year G-sec yield has been on the rise since July last year (due to increased government borrowings, higher debt-to-GDP ratio, weak rupee, high inflation, rate hikes and overall
economic uncertainty), the real returns (also known as the inflation-adjusted returns) on bonds have made them less appealing. They are expected to generate poor returns going forward. In such a case, gold would be looked up to as a strategic
portfolio diversifier (rather than bonds) for the long term by smart investors.
(4) Geopolitical tensions
In many other parts of the world, geopolitical tensions are escalating. For example, the Russian-Ukraine war, tensions between China and Taiwan, tensions between India and China at the border and
so on. In such times of uncertainty, which may have an impact on society, policy and the global economy, the spotlights would turn on gold. The RBI being cognisant of the risks involved has been buying gold, and so are a few other central
banks.
[Also Read: Are Sovereign Gold Bonds worth the investment?]
(5) Stock market volatility
The volatility in global financial markets is impinging upon domestic financial markets, including the currency market. Going forward, the stock market movement will be determined by inflation,
monetary policy actions taken by central banks and the geopolitical landscape. In intense volatile times, gold is expected to gain attention and do well.
So far in the calendar year 2022, gold has delivered around +8% absolute returns
(as of August 16, 2022), and it is possible that by the end of the calendar year 2022 the returns may get even better. Gold demand may improve backed by a normal southwest monsoon and upbeat sentiments during the festive season.
This
Ganesh Chaturthi, along with buying physical gold (bars, coins, jewellery, etc.) consider ‘investing’ in gold the smart way –– in the form of Gold ETFs, Gold Savings Funds,
Digital Gold, and/or Sovereign Gold Bonds ––– and approach gold strategically by allocating around 10% to 15% of your entire investment portfolio towards gold and hold with a long-term view (of over 5 to 10 years), assuming moderate-to-high risk.
Sovereign Gold
Bonds are issued by the RBI on behalf of the government in the denomination of 1 gram of gold and multiples thereof. They have a tenor of 8 years (with an exit option at the end of the 5th year to be exercised on the interest payment date)
and are tradable on the stock exchange. You can earn interest 2.50% p.a. (fixed rate) on the investment amount plus hold the potential to appreciate over time.
Or you could consider investing in a Gold Savings Fund. It is an open-ended
Fund of Fund scheme investing its corpus into an underlying Gold ETF, which is benchmarked against the prices of physical gold. Over time your, returns would closely correspond to returns generated by the underlying Gold ETF and may appreciate.
You see, gold in your portfolio would serve as a hedge and portfolio diversifier when other asset classes fail to post alluring returns.
Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
