While equity markets are facing selloffs amidst rising Crude oil prices sparking inflation and concerns regarding Russia – Ukraine border tensions, Gold prices have rallied. They have risen to an 8-month high. Here are reasons why this year might be good for Gold:
1. Russia-Ukraine Border Tensions: Russia is presumably adding more troops near the border and has invaded Ukraine. Gold prices have climbed to their highest since June 2021. As witnessed historically, Gold has the potential to perform better during periods of geopolitical crisis.
2. 40-year high inflation: Fresh inflationary readings have shown that prices are at a 40-year high in the US, and there is virtually no quick solution to curtail inflation from moving higher. Inflationary pressures are witnessed in varied degrees across the globe, and it could have an impact on growth prospects as well.
3. Rising crude oil prices: While stock markets may not be directly related to rising crude oil prices, the increase in prices can lead to a rise in input costs of several ancillary industries such as transport and logistics, refineries, paints and others. Since India is a net importer of crude oil, rising crude oil prices can impact the profit margins and eventually lead to a fall in companies’ stock prices. Hence, there is a need to look beyond equity mutual funds to minimize downside risks due to rising crude oil prices and inflationary pressures.
4. US Fed Monetary Tightening Policy : As per the minutes of the Federal Open Market Committee (FOMC), inflation has started to spread into the broader economy and hence called for a measured approach to monetary tightening. Accordingly, US Federal Reserve will begin unwinding the nearly $9 Trillion balance sheet. The rate hikes are expected to start as soon as March 2022. This could mean increased FPI outflows, we are already seeing effect of it manifest in form of outflows in Indian equity markets over the last few months. Rising interest rates on US Bonds would increase its attractiveness and lower the appetite in riskier assets such as Indian Equities. Resulting outflows can lead to pressure on the rupee and any depreciation could help the gold price. However, since Gold prices could benefit generally tend to be in line with the rate of inflation, it gives a better opportunity to cope with inflation and the impact of FPI outflows due to monetary tightening.
5. Gold vs. Bitcoin
Cryptos cannot be compared to Gold as they are neither currency nor a long-term store of value. They do not have intrinsic value. Additionally, they are highly volatile. Add to this, the Union Budget 2022-23 has proposed to tax Crypto at 30% plus TDS of 1%. This will impact investor gains. RBI Governor Mr. Shaktikanta Das compared cryptocurrencies with the infamous Tulipmania of the mid-1600s. He has cautioned investors to be vigilant while investing in cryptocurrencies. So, we believe that Gold should be preferred as the risk/portfolio diversifier.
Gold remains a risk-reducing portfolio diversifier due to its several properties.
• Helps to cope better with inflation
• Long term Store of value
• Upholds value during macro-economic uncertainty
Thus, the fundamentals are strong for Gold and hence investors can use the opportunity to add to their gold allocation.
Investors can use the opportunity to invest in Gold ETFs and Mutual Funds and gradually build their gold allocation to form up to 20% of their investment portfolio. Investors can use our simple 12-20-80 Asset Allocation Strategy that offers the benefits of diversification and reduced downside risks.
After setting aside money equivalent to around 12 months of expenses in an emergency corpus with a Liquid Scheme or Bank Savings Account, investors can consider investing 20% of their portfolio to avail the potential of risk reducing and portfolio diversifying asset of Gold with Gold ETFs and Mutual Funds. Thereafter, investors can invest the balance 80% in a diversified equity bucket comprising of mutual funds as per different styles and market-cap/sectors.
The advantage of a mutual fund that invests in Gold is that investors can also invest using a monthly SIP (Systematic Investment Plan) of Rs.500 without opening a DEMAT account. So start building your allocation to Gold with an SIP today.
Please note the above is suggested fund allocation only and not an investment advice / recommendation.
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