Gold prices are at a record high in international and domestic markets. While the Reserve Bank of India data suggests a slowdown in demand for physical gold due to high prices, the debate over gold as an investment continues. Like equity assets, retail investors tend to think about buying gold when prices peak. It may not be a good idea.
Gold prices have doubled over the past five years. They struggled to reach that value. The world had to go through some significant upheaval due to the COVID-19 pandemic. There were supply chain disruptions in the world due to the US-China trade war in the beginning. Then, it was the war in Ukraine that fueled global inflation. Food and commodity prices have cooled off, but inflation remains a severe threat to the world. Additionally, a scare of the US’s small and medium banking sector collapse pushed more towards gold. In such a situation, gold is considered a haven.
However, while investing, you need to focus on the future. A global pandemic is a once-in-a-lifetime event. It triggered a surge in gold prices as they languished at the same level for five years to 2018-19. If you believe the world will panic for the next five years or more, you should invest in gold. Major international institutions are discussing a slow and steady recovery for the world. India is considered a bright spot for economic growth.
The World Bank and the International Monetary Fund expect India’s growth to be the fastest among major economies for several years. At the same time, new research from the Reserve Bank of India led by deputy governor Michael Debabrata Patra suggests that inflation will likely be lower. It argues that supply shocks pushed consumer price inflation to a high inflation regime. There are signs that it is now moving towards a low inflation regime. Excerpts of the research were published in the latest RBI Bulletin.
Gold buying intensifies in an era of high inflation. Many large institutional and high-net-worth investors use gold to hedge against a strong US dollar and high inflation in local economies. Gold prices moved nowhere between 2013 and 2018 as India lowered inflation to manageable levels from a peak of 13-14%. The RBI data for April 2014 shows that RBI had gold worth R61,982 crore. By April 2018, the gold held by RBI was R67,331 crore. By April 2023, RBI had gold worth R2,32,981 crore, a four-fold jump even when prices have only doubled. That shows RBI bought a lot of gold during the five years to April 2023.
A lot of our connection with gold is associated with emotions. You buy gold during the festive marriage season, irrespective of the price. If you are an investor in gold, you must time your buying into gold with the price cycle. You cannot get emotional and pile up gold at any price. Those who bought gold in 2013 have merely doubled the value of their investment by 2023. In the meantime, the Sensex has more than tripled since 2013.
If you must invest in gold, keep a small portion of your portfolio allocated to gold. It was not just the RBI but many other central banks worldwide that bought gold when prices were stagnant. The press usually reports about such gold buying. You must keep track of announcements in the press about global central banks buying gold. Central banks like the RBI tend to buy more gold when they fear higher inflation in the economy and a pressure on their local currencies.
If you cannot track that information, you must understand that gold is a mere savings asset and a hedge against inflation risk. It may or may not be better than keeping cash or fixed deposits. Gold prices are driven by demand and supply and the perception of risk in the financial markets. You cannot build your financial well-being by merely accumulating gold. For long-term financial goals, you must regularly invest in equity assets as they are more rewarding than other asset classes.
Time your buying
If you are an investor in gold, you must time your buying into gold with the price cycle. You cannot get emotional and pile up gold at any price. Those who bought gold in 2013 have merely doubled the value of investment by 2023.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)