Investors should have 10 per cent of their portfolio in gold

If global growth improves with price rise in check, that would be negative for the yellow metal

While gold has rewarded investors richly over the past three years (compound annual return was 14.8 per cent), it has been in correction mode over the past six months (down 5.8 per cent). If you plan to buy gold jewellery or coins for religious or cultural purposes this Akshaya Tritiya, you may do so.

But if you plan to buy the yellow metal for investment purposes, you should be informed about the factors that could have a bearing on its price in the near future.

Recent underperformance

Gold gave a stellar return of 27.9 per cent in rupee terms in 2020. This year, however, it is down 4.9 per cent year-todate. Praveen Singh, assistant vice-president, research, currencies and commodities, Sharekhan by BNP Paribas, says, "Since hitting an all-time high of $2,075 in July 2020, gold has been under pressure. It hit a low of $1,675 in 2021. Prices have recovered since then, but are still down for the year.”

The yield on the benchmark 10-year US treasury bond rose from 0.52 per cent in August 2020 to a 14-month high of 1.75 per cent in March 2021. Singh says, “The bond market is pricing in a rapid economic recovery. Gold prices fell as yields rose.”

The successful development of Covid-19 vaccines and their aggressive rollout in the developed world from November 2020 have strengthened the perception that the global economy will recover swiftly. As risky assets rallied, the yellow metal’s safe-haven appeal diminished.

Cryptocurrencies also played a part. Singh says, “The exponential increase in the prices of cryptocurrencies, especially Bitcoin, has further reduced gold’s appeal.”

Positive drivers

The new waves and variants of the virus are taking a toll on the fragile economic recovery, especially in India. This could trigger a pullback in risky assets like equities. Chirag Mehta, senior fund manager, alternative investments, Quantum Mutual Fund, says, "Gold could benefit from the resulting risk aversion, as happened last year."

Central banks across the world have said that interest rates will remain accommodative for a fairly long period. Meanwhile, commodities have rallied. Agri-commodities, metals and crude, among others, are up significantly. Higher inflation could push real rates lower or into negative territory.

Mehta says, “In many nations, interest rates remain negative on a real basis. Whenever this happens, money shifts from bonds to gold as the latter has the ability to preserve purchasing power over the long run.”

The dollar may remain under pressure. All pandemic relief measures have added to the country’s already massive debt. If the dollar weakens, gold will move up.

What could pull gold down

The main risk to the yellow metal could come from a sharp rally in the dollar. Kishore Narne, head–commodity & currency, Motilal Oswal Financial Services, says, "If US growth rate improves without any inflation, then the dollar would rise, driving gold down."

What should you do?

Irrespective of near-term price movements, maintain an allocation to gold as it acts as a hedge against a downturn in equities. Rishad Manekia, founder and managing director (MD), Kairos Capital, says, “Gold also protects your portfolio against the rupee’s tendency to depreciate against the dollar over the long term."

Investors should have a 10 per cent allocation to gold in their portfolios. Narne says, “Gold has corrected about 20 per cent from its peak, providing a good opportunity to those who wish to buy it.”

Those who are building their exposure may buy 50 per cent of the required amount now, and the rest over the next six months on price dips.