Image used for representational purpose only. (File Photo)
Image used for representational purpose only. (File Photo)

Stocking gold amid wars, inflation

Both gold and the benchmark Nifty index trade around 8.5 per cent below their peak highs, but stock market mavens suggest allocating greater part of portfolio to gold than in the past.

MUMBAI: Should paper gold - ETFs & SGB - be part of an investor's portfolio as stocks turn volatile, buffeted by rising oil and geopolitical tensions? If so, how much should be allocated to it?

Conventional wisdom suggests that it should be, but wealth managers and market experts recommend higher apportionment from the 5-8 per cent earlier to 10-15 per cent and to even a fifth, given recent geopolitical tensions, fears of new COVID variants and spectre of rising inflationary expectations in the US, India and other parts, raising the probability of its testing a record high past Rs 56,000 per 10 gm hit in August 2020 in the wake of the Pandemic.

Gold once again caught Indian investor fancy since February, on rising inflationary expectations with the US Central Bank raising a key interest rate in March, its first in four years, and culminated in it hitting a 20-month high in Indian rupees earlier this month in the wake of Russia's invasion of Ukraine, which saw stocks plummet globally.

The yellow metal surged to Rs 54,066 per 10 gm (prices exclude GST) on March 9, its highest since the peak of Rs 56,029 on August 7, 2020, as per trade body India Bullion & Jewellers Association (IBJA).

And though the price has since cooled to Rs 51,684 on March 25, further escalation in Eastern European tensions, expectations of more rate hikes this year by the Fed - which will pressure the rupee - after its 25 bps hike earlier this month, and the onset of the marriage season in India could keep prices on the boil.

Hardening interest rates globally typically lead to outflows from emerging market equities and debt as the cost of money in the West rises, reducing the spread between the returns here and the cost of money plus the currency hedging costs a foreign investor faces. This, along with higher inflation, puts pressure on the local currency, which raises the price of gold for its holders.

Both gold and the benchmark Nifty index trade around 8.5 per cent below their peak highs, but stock market mavens suggest allocating greater part of portfolio to gold than in the past. "We are bullish gold," said Nilesh Shah, MD, Kotak Mahindra AMC.

"We believe post Russia sanctions, China and other large holders of FX reserves will diversify into gold. This will create additional demand for gold and support the gold prices. The best way to invest gold is via SGB (sovereign gold bonds). Next best is gold ETF. Gold is an offshore asset class also for India," he said.

Shah recommends an investor allocating 10-15 per cent to paper gold. Gold has appeal as a safe haven, as during conflicts like the Russian - Ukraine one, and is also used as a hedge against inflation-rising oil prices, with India importing 80 per cent of its crude requirement.

Many analysts also feel that stocks could take a bigger hit soon with levels of 15500 almost being tested by Nifty on March 8. "Based on geopolitics, inflation, and a general slowdown in the economy, I think equity markets are overpriced at the current juncture," said Nikhil Kamath, co-founder of India's largest retail brokerage Zerodha.

"Diversification into tools that could act as a hedge against inflation will be a prudent way to go. Gold, historically, has acted as a good hedge and it will make sense to allocate 15-20 per cent of ones portfolio to it," Kamath said.

Investment bank Goldman Sachs has upgraded its 12-month price target of gold to USD 2500 an ounce (31.10gms) from USD 2150 earlier, given the simultaneous acceleration of all the demand drivers for the yellow metal. "This could push prices well above the record high of Rs 56,029 in 2022," said Hormuz Maloo, director AFco Invetsments.

Rising Case for Portfolio Diversification

  • Investors advised to increase portfolio allocation to paper gold amid geopolitical tensions, rising inflation & volatile stock markets

  • Sovereign gold bond subscribed value at Rs 37,906 crore as on January 2022

  • AUMs of gold ETFs rise by almost 30 per cent year on year in Dec to Rs 18405 crore

  • Inflationary hedge and safe haven appeal of gold makes Goldman Sachs raise 12 m price target on gold to USD 2500 an oz from USD 2150

  • In rupee terms, gold expected to surpass 2020 high of Rs 56029 (ex-GST) amid rising inflation and weaker rupee

  • FIIs sell Indian stocks worth USD 18.5 billion so far this fiscal

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