Protect equity market gains with 10-15% investment in gold
Potential rate cuts in the US this year could boost yellow metal’s performance
Equities, which are trading at high valuations and have also been volatile lately, pose the risk of periodic selloffs. In this environment, experts recommend diversifying portfolios. That puts the focus on gold, which can act as an effective diversifier.
Experts say investors must have an allocation to gold despite its current price level of around $2,000 per ounce in the international market and above ~61,000 per 10 grams in the Indian market.
Gold the stabiliser
When equities tank, gold generally remains steady and protects the downside. “Gold has a very low correlation with equity. It makes sense to have it in one’s portfolio keeping the political and economic risks of 2024 in mind,” says Vishal Jain, chief executive officer (CEO) of Zerodha
Fund House.
In a good spot
The US Federal Reserve (Fed) has signaled it might lower interest rates this year, which could weaken the dollar as money moves out of developed markets. A weak dollar should, in turn, support gold prices.
“The US slowdown and the resulting Fed easing are likely to make conditions conducive for gold prices in 2024 as the attractiveness of competing asset classes diminishes,” says Ghazal Jain, fund manager-alternative investments, Quantum Asset Management Company (AMC).
Vikram Dhawan, head of commodities & fund manager, at Nippon India Mutual Fund, agrees. “If the dollar and interest rates cool off further in 2024, the macros and investor sentiment may turn favourable for gold,” he says.
Rising geopolitical risks — the Russia-ukraine war, and the Hamasisrael conflict — could also push the demand for gold.
Record central bank buying kept the price of gold up over the past couple of years despite rising interest rates. Sustained central bank purchases and physical demand from China could support prices in the future as well.
“Any further correction may bring in central bank buying and physical buying from China in the short to medium term,” says Dhawan.
He adds that sustained volatility in risk assets like stocks could also reverse investor sentiment and drive gold prices higher.
Jain of Zerodha says global political developments could be another driver. “2024 is ‘the election year’ with more than 64 countries, or approximately 50 per cent of the world population, going to polls. Elections usually have a strong bearing on gold, which investors turn to for safety amid uncertainty,” he says.
Near-term volatility likely
In the near term, gold prices could be volatile in the international market. “A broad consensus can sometimes lead to underperformance in the near term. There is a risk of near-term volatility in both gold and silver, though this would be a buying opportunity for the medium to long-term,” says Dhawan.
Quantum’s Jain also believes gold may remain volatile in the near term due to the uncertain monetary policy path. She adds that the downside would, however, be limited given the eventuality of rate cuts in 2024 and growing geopolitical unrest.
Is it time to buy?
Investors may worry about whether one should buy at current levels. “For longterm investors, there is a case for buying gold even at current prices. Investors overweight on equities may want to consider gold as a hedge or diversification,” says Dhawan.
Adds Jain of Quantum AMC: “Investors should use this period of consolidation in gold prices to build their long-term exposure. With global interest -rate cuts likely to kick in, the downside looks limited. These price levels are a good entry point for longterm allocation. We recommend a strategic allocation of 10-15 per cent,” says Jain of Quantum AMC.
How to buy gold?
Gold exchange-traded funds (ETFS) or gold savings funds can be an effective means to gain exposure to gold for the short to medium term. Quantum AMC’S Jain advises selecting gold ETFS that have a low tracking error and staggering investments to reduce the average cost. Long-term investors may buy sovereign gold bonds (SGBS). They track the price of gold and pay an interest of 2.5 per cent per annum on the issuance price throughout the eight-year tenure. Interest is taxed at the slab rate. Capital gains are exempt from tax at maturity. Investors in higher tax brackets may find SGBS attractive.