Is it advisable to allocate funds towards gold purchases?
In the past few months, gold prices have reached new heights, surpassing Rs. 40,000 per 10 grams. This trend has caught the attention of many investors, but is gold a wise investment choice?
Historically, gold has kept pace with inflation, but it has not significantly increased the value of savings. Investing in physical gold can incur storage costs and liquidity issues. The right way to invest in gold is via gold bullion, such as coins and bars, or through gold-backed instruments like Gold ETFs.
The rise in gold prices is primarily due to global factors. Geopolitical tensions and security concerns, such as conflicts in the Middle East, the Russia-Ukraine war, and U.S.-China frictions, have heightened uncertainty, prompting investors to seek gold as a safe haven asset. Persistent inflation pressures, especially in major economies like the U.S. and Europe, have kept gold attractive as a store of value amid fears that inflation will erode purchasing power.
Shifts in U.S. dollar strength and interest rates also impact gold prices significantly. A weakening U.S. dollar raises the dollar-denominated price of gold, while relatively low or stable real interest rates reduce the opportunity cost of holding non-yielding gold. Central bank buying and institutional demand have increased notably, with many large financial institutions projecting continued gold price appreciation.
Market-driven dynamics and investor sentiment around uncertainties in global trade policies and economic outlook have led to strong inflows into gold-related investments, further driving prices upward. The $3,300–3,500/oz price range is key, with potential surges to $3,700–4,000/oz if current drivers persist.
In India, increased import duty on gold, from 2.5% to 12.5%, is one of the domestic factors contributing to the gold rally. However, it is essential to note that gold jewelry should not be considered an investment in gold but rather a consumption item.
While gold can help reduce risk through diversification due to its negative correlation with equities, over the long-term, equity has proven to be a better asset class for wealth creation compared to gold. For the same invested amount for 10 years, equities would have given over Rs. 70,000 more return than gold. For the 15 years, the additional returns you would receive by investing in equities would be close to Rs. 1 lakh.
Investing in Gold ETFs requires a Demat Account, which can add hassle. An alternative to investing in physical gold is through instruments that buy, store, and sell gold on your behalf, such as Gold ETFs. Gold Saving Mutual Funds can be invested in on the provided platform. It is recommended to limit exposure to gold investments.
In conclusion, gold's ascent reflects its dual role as an inflation hedge and safe haven amid geopolitical unrest, combined with steady institutional buying and a complex interplay of currency and interest rate factors. While gold can provide a valuable role in a diversified investment portfolio, it is crucial to consider the potential risks and returns before making an investment decision.
Venturing into personal-finance, mutual funds can offer an alternative to investing in gold through Gold Saving Mutual Funds, which buy, store, and sell gold on your behalf without the need for a Demat Account. Despite gold's current attractiveness as a safe haven in times of global turmoil and inflation, long-term investing in mutual funds, specifically equities, has demonstrated better returns than gold, making it a promising choice for wealth creation.
