Gold continues to glitter. What should investors do?

As gold prices surge to historic levels in India, here is what investors should do.

Why has gold been a preferred investment?

Gold is universally recognised as one of the best investments to preserve value, capital, as well as purchasing power. Over the last two years, in the domestic market, gold has seen an outstanding return of more than 50 per cent compound annual growth rate (CAGR), Deveya Gaglani, Senior Research Analyst at Axis Securities said.

According to Sachin Jain, Regional CEO (India) of World Gold Council, in India, gold is at the centre of celebrations on auspicious occasions such as Akshaya Tritiya or weddings, where consumers celebrate by purchasing gold in the form of coins, bars, jewellery, and ticket purchases through digital gold buying platforms.

“Indian households have a strong cultural affinity for gold, and the appreciation in prices has further strengthened the demand for gold as an investment asset, resulting in increased consumer interest in Gold ETFs. Given the strong cultural connect, any short-term softening of gold prices could see record gold demand this Akshaya Tritiya,” Jain said.

How much have gold prices surged?

Gold prices recently reached historic highs of Rs 70,000 in India, mainly due to geopolitical tensions and Central Banks’ accumulation of gold reserves, which have outweighed the hawkish stance adopted by US Federal Reserve officials this year, Gaglani said.

Gold prices have witnessed a sharp rally in the month of March 2024, with prices hitting all-time highs in domestic and international markets. Gold prices in India have crossed Rs 73,000 per 10 grams, while at COMEX prices have crossed $2,400 per ounce, Tapan Patel, Fund Manager- Commodities, Tata Asset Management, said.

And will this surge continue?

Gold prices may continue to get support from global macro headwinds, Central Banks’ buying, and geopolitical factors. The US Fed pivot of interest rate cycle may provide a sudden boost to the prices where market is still bracing for ‘higher-for-longer’ rate scenario, Patel said.

“Since domestic gold prices are hovering near record highs, there is a chance of a technical correction in gold price in the immediate run,” Hareesh V, Head of Commodities, Geojit Financial Services, said. But in the long run, firm overseas prices, increased physical demand, and a weak rupee would assist prices to retain their bullish outlook, he added.

What is the expectation on gold investment returns?

“We believe this year itself we are going to witness a slowdown in the returns generated by gold, compared to the last two years. This conjecture is based on several factors, one of the key ones being the strengthening of the US dollar riding on the back of an expected relaxation of interest rates by the Fed later this year,” Shashank Pal, Chief Business Officer, PL Wealth Management, said.

In addition, Central Banks of the world are currently on a buying spree. Such a spree will definitely taper down within the next one or two quarters, thus markedly lowering demand, Pal added.

What should investors do?

Gold is one of the best long-term assets which offers both safety and decent returns to its investors. Domestic gold has more than doubled in the last 5 years, and it gained 10 times since 2003. So, investors can make use of every price correction to add the metal into their portfolio for long-term benefits, Hareesh said.

Analysts recommend buying gold in smaller denominations rather than making large purchases. Investors should consider factors such as market trends which are a bit volatile, geopolitical events such as the Middle East crisis, and delay in interest rate cuts by the US Federal Reserve, and their own financial goals before investing in gold during Akha Teej or Akshaya Tritiya, Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities, said. Timing purchases strategically and diversifying investments can help mitigate risks and maximize returns in the long term, he said.

According to Adhil Shetty, CEO, BankBazaar.com, gold prices tend to increase in spurts followed by lean periods where the prices tend to hold steady, or even drop. This means that long-term gold investments may not appreciate as much as you see happening right now.

Secondly, physical gold is also very illiquid. Gold jewellery comes with overheads such as making charges and GST, which can reduce the value by as much as 20-25 per cent in some cases. “While gold coins solve that problem, selling physical gold remains tough. Most gold can be only exchanged and not sold outright,” he told The Indian Express.

What other gold-related instruments can be considered for investment?

Investors may choose dynamic asset allocation to the gold-related instruments available in the market, apart from the physical ownership of gold. Long term investors may look at SGBs to take additional advantage of fixed interest on the investment, Patel said.

Investors looking for medium to short term investment through staggered or lump sum buying may opt for gold ETFs schemes.

“There are alternatives such as SGBs from the government, or Gold ETFs in the capital markets, and sophisticated Fund of Funds schemes that are available today in the market,” Pal explained. These kinds of instruments allow for easy liquidity and take away the added worries about testing for purity. Storage is another issue that can be avoided by investing in gold based financial instruments, he said.

“Digital gold in the form of ETFs and mutual funds may be a much better option if you are looking to invest in gold. Nevertheless, it is best to restrict your investments in gold to not more than 5-10% of your portfolio,” Shetty said.

Analysts suggested while choosing any of the gold-related investments, investors should take into consideration factors such as investment horizon, taxation, and liquidity.