Gold prices rise more than 15% in last three months; what strategies should investors opt now? Several factors have pushed up the yellow metal in the past three months. Will the rally in precious metal continue? What should investors do? Is bullion a good investment? How to invest in gold. ET Wealth answers all your questions
Investors in gold have never had it so good in recent times. The yellow metal has risen more than 15% in the past three months and emerged as the best performing asset class since the beginning of 2024. Silver, too, has done well, delivering more than 13% since 1 January. Analysts expect gold and silver to rally further as several factors have turned positive for the precious metals. Inflation has remained high, while the prospect of monetary easing by major central banks and geopolitical tensions in the Middle East and Ukraine have combined to push up gold prices.Interest rates are an important factor that determine the trajectory of gold prices. When interest rates are high, gold becomes less attractive. When the US Fed hiked interest rates in 2022 and 2023, gold prices dipped (see chart). But in recent months, the US Fed has become less hawkish and more inclined to cut rates. Global gold prices have rallied on these expectations. “Gold prices could remain choppy in the months ahead as the market reacts to geopolitical developments. The medium term outlook for the precious metal is promising, given the imminent turn in the US interest rate cycle,” says Chirag Mehta, CIO, Quantum Mutual Fund.
Gold has also rallied due to strong buying by central banks in the past few months. News reports say some countries are trying to reduce their US dollar reserves following the freezing of Russia’s reserves by the US and Europe, and are shifting to gold. “Increased buying of gold by central banks, especially China, in the quest to reduce dollar exposure (also called de-dollarisation), is the key reason for the spike in gold prices,” says Vidya Bala, Co-founder, PrimeInvestor.in.
Will the rally in precious metal continue? A report by DSP Mutual Fund says gold, silver and other precious metals are likely to lead over the next few quarters. “Gold is in a sweet spot. It will rise if inflation remains high, but also do well if prices cool down and interest rates are cut,” says Raj Khosla, Managing Director of MyMoneyMantra. “Heightened geopolitical tensions will boost the metal further,” he adds.
What should investors do?
Don’t allocate more than 10-15% of your portfolio to the metal.
The DSP Mutual Fund study notes that investments in gold tend to be price reflexive. This means that more investors flock to gold when it is in a bull market momentum. Many investors are already getting ready to buy more gold, though analysts feel one should not get carried away by the rally in prices. “Investors who wish to increase exposure to gold need to understand that it has no underlying fundamentals,” says Bala. “There is no need to increase exposure if you already hold gold. In asset classes such as gold, averaging works best when it is not the most sought after, not when it is rallying.”
Financial planners say investors should look at gold as a diversification tool, not as an investment that will earn high returns. Yes, gold should be part of the investment portfolio, but the allocation to the metal should not exceed 10-15%.
That’s roughly what most multiasset funds allocate to the metal.
These are hybrid funds that invest in a mix of stocks, debt instruments and commodities such as gold and silver. This category became very popular after the Covid-induced crash in early 2020 and has seen massive inflows in the past 2-3 years. The twin rallies in equities and gold have helped the category deliver astounding returns. ICICI Prudential Multi Asset Fund, by far the largest multi-asset scheme with an AUM of Rs.36,843 crore, has clocked an annualised return of 25.7% in the past three years, beating many pure equity fund categories.
Note: “Gold prices could remain choppy in the short term due to geopolitical developments. The medium-term outlook is promising given the imminent turn in the US interest rate cycle.”
CHIRAG MEHTA
CIO, QUANTUM MUTUAL FUND
Before you get into these funds, keep in mind the changes in tax rules. Gains from multi-asset funds are taxed at the normal slab rate and there is no indexation benefit. Financial advisers say it is a better option to invest in stocks, debt instruments and gold separately so that you get the tax breaks that pure equity funds enjoy. Long-term gains of up to Rs.1 lakh are tax-free in a financial year, while shortterm gains are taxed at 15%.
How to invest in gold
The choice depends on the investment horizon and individual needs.
Sovereign gold bonds (SGBs) have become very popular with investors in recent years. These eight-year bonds are issued by the RBI and are linked to the price of gold. Each bond represents 1 gram of gold. Backed by a sovereign guarantee, these are super safe instruments. The investor also gets a 2.5% interest every year on the invested amount. Though this interest income is fully taxable at the slab rate of the buyer, it boosts the overall returns for the investor. Further, if the bonds are held till maturity, there is no tax on the capital gains. Investors who bought the first tranche of the SGB in 2015 pocketed tax-free annualised returns of 11% when the SGBs matured in November 2023.
Note: “Gold is in a sweet spot. It will keep rising if inflation remains high, but also do well if interest rates are cut. Geopolitical tensions will boost it even further.”
RAJ KHOSLA
MANAGING DIRECTOR,MYMONEYMANTRA.COM
The only glitch is that there is a lock-in period of five years before these bonds can be sold. If the investor has a long-term perspective and intends to hold for more than 7-8 years, SGBs are the best option.
Investors with a shorter investment horizon and those looking for greater liquidity can opt for gold ETFs or gold mutual funds. Gold ETFs can be bought on stock exchanges, just like any security. These have very low annual charges, but you need a demat account and a stock trading account with a brokerage to invest in them.
The positive thing about gold ETFs is that there is no lock-in period and can be bought and sold anytime. Till 2022-23, investing in gold ETFs offered the additional benefit of indexation if these were held for more than three years. However, last year’s Budget changed the tax rules for non-equity assets. Now, all gains from gold ETFs are added to income and taxed at the slab rate of the individual.
Investors who don’t want to buy ETFs on stock exchanges can opt for gold funds instead. These funds invest in gold ETFs. So you have to pay the fund management charges to the fund manager for the convenience of not buying ETFs yourself and holding them in a demat account.
Is bullion a good investment?
Though you pay high making charges, you also get to use the item.
Financial planners generally say that buying physical gold is not a good idea. Apart from the high making charges of ornaments eating into the returns, there are purity concerns and storage is risky as well as costly. The making charges of some leading jewellery brands can be as high as 35-40% of the value of the ornament. A necklace worth Rs.1 lakh will have a gold value of only Rs.60,000-65,000. Even if gold continues to rally and prices rise by 15% for the next three years, the resale value of the necklace will not reach the amount paid for the ornament.
At the same time, the buyer gets to use the gold. There is also no recurring charge on the ornament. This is something worth considering when you invest in the metal.
Note: “There is no need to increase exposure if you already hold gold. In asset classes like gold, averaging works best when it is not the most sought after, not when it is rallying.”
VIDYA BALA
CO-FOUNDER,PRIMEINVESTOR.IN
This story originally appeared on: India Times - Author:Faqs of Insurances
