Central banks in emerging markets are accumulating gold reserves as tensions persist in West Asia, enhancing the metal’s status as a reliable store of value. Additionally, the near certainty of an extended pause in US interest rates further bolsters the case for gold, says an ET analysis by Prashant Mahesh.
Tapan Patel, fund manager – commodities at Tata Asset Management, advises, “Investors could increase their allocation to gold from 8-10% to 10-15%, over the next three months, given the positive outlook for gold.”
Gold prices have experienced a significant upswing in recent times, outperforming the Nifty 50 over a 5-year period with a return of 17.39% compared to the Nifty’s 15.24%.However, gold underperformed over a 10-year period, yielding a return of 9.02% against the Nifty 50’s 13.3%. In the last three months, gold prices have surged by 19%, and over the past year, they have risen by 22.8%.
Gold Funds
Financial advisors highlight several factors that could drive gold prices higher and recommend that investors accumulate the precious metal during any price dips in the coming three months.
The US Consumer Price Index (CPI) increased by 0.3% in April, following advances of 0.4% in March and February. This suggests that inflation has resumed its downward trend at the beginning of the second quarter.
Ghazal Jain, a fund manager at Quantum Mutual Fund, warns that any escalation in geopolitical tensions, fiscal or monetary measures to bolster the economy before the US elections, and the recently announced deceleration in Fed balance sheet reductions could adversely affect inflation, maintaining gold’s relevance.
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Patel adds that gold prices will remain robust due to significant purchases by central banks, particularly China, Turkey, and Russia. The Ukraine invasion raised concerns about the risks associated with US dollar exposure for many nations.
As a result, central banks globally are actively accumulating gold to diversify their reserves and reduce their reliance on the US dollar. In China, retail investors are also purchasing gold, further increasing demand for the precious metal. Prior to 2020, when the Chinese government cracked down on real estate, it was one of the most favored forms of savings for retail investors. With the local property market falling out of favor, investors have shifted their focus to gold.
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Anup Bhaiya, managing director of Money Honey Financial Services, advises, “Retail investors could stagger their bets in 3-4 tranches using a buy on dip strategy, instead of buying at one go.”
He suggests that investors in higher tax brackets could use a combination of sovereign gold bonds and multi-asset funds to build their exposure in a tax-efficient manner, while those whose income is not subject to tax could opt for gold ETFs or gold funds. Some multi-asset funds are taxed as equity funds, while others are eligible for capital gains tax with indexation benefits if held for three years.
