Akshaya Tritiya, an Indian annual springtime festival, which falls in the Hindu month of Vaisakh is considered a very auspicious day signifying unending prosperity. This is the day in a year when the Sun and the Moon are at the acme of their brightness.
It is believed that embarking on new beginnings on this day, be it a new investment, business, or other such venture can be assured smooth progress without any major hurdle. Buying gold on Akshaya Tritiya is a custom in many Indian households as it is expected to bring prosperity, good fortunes and eternal wealth. This year the festival will be celebrated on May 14.
In India gold is seen as an asset to preserve the wealth that is passed on from one generation to another and is an important part of various celebrations. It is no wonder that we are one of the largest consumers of gold in the world.
How has gold fared in the past?
Gold is a great portfolio diversifier, especially during uncertainties. As an asset class, gold has a negative correlation with other assets during risk-off periods, protecting the investors’ capital against tail risks, and other events that have an adverse impact on capital or wealth. It is also devoid of default risk and credit risk.
It can protect your wealth when the equity market is going through a tumultuous phase. Moreover, gold is a good hedge against inflation — when interest rates fall, gold prices can be expected to rise. This is why gold has demonstrated its appeal and fared well over the long-term.
Graph 1: Gold has proved its worth as an effective portfolio diversifier
(Source: ACE MF, PersonalFN Research)
As we can see in the chart above, gold has outperformed the Nifty 50 index as well as the Crisil Composite Bond Fund index on many occasions in the past. If your recall, when the equity indices plunged sharply amid the COVID-19 crisis and debt market was grappling with liquidity concerns, gold as an asset class soared to new highs and acted as an effective portfolio diversifier, a hedge, safe haven, and commanded a store of value.
And now when the equity and debt market have recovered significantly, gold continues to protect investors against rising inflation and support growth amidst uncertainties though it has somewhat lost sheen in the interim.
Should buy gold this Akshaya Tritya?
Notably, gold after reaching a peak of Rs 55,922 (MCX price per 10 gram) on August 07, 2020, fell substantially placing it around 21% lower at Rs 44,106 as on March 31, 2021. The COVID-19 inoculation drive, rise in bond yields, and a resilient India rupee against the greenback turned the spotlight away from gold amidst a risk-on period.
However, over the past few weeks, gold again witnessed a jump after an unexpected drop in US job growth data in April causing a decline in the Dollar, inflation concerns, and a fall in US treasury yields. Several US Fed officials expect dovish monetary policy to continue for some time despite the recovery seen in the economy was another factor that lead to a surge in gold price.
Prices are likely to appreciate further in the near term as the second wave of COVID-19 in India and other countries poses a challenge to economic recovery. Central banks across the world too have been maintaining healthy gold reserves amidst times of COVID-19 pandemic and the resultant global economic uncertainty which will prove to be bullish for the yellow metal.
Despite the recent uptick in prices, gold is still down around 15% from its peak and has the potential to scale up again. The sentiment for gold is positive in the futures market — contracts for delivery on June 4 are trading over Rs 48,000 per 10 grams. The correction in gold prices can be used by investors as an opportunity to gain exposure in the commodity.
Graph 2: Gold price climbs amidst economic uncertainties
Data as on April 22, 2021
(Source: ACE MF, PersonalFN Research)
Note that in the calendar year 2021, the following factors would prove supportive for gold:
- The risk of second wave of Covid-19 derailing global economic recovery
- Many countries resorting to fiscal measures and borrowings to fight the impact of the pandemic on the economy. Thus, the fiscal deficit is widening and the debt-to-GDP ratio is proliferating
- Muted consumption in many parts, as people are focusing on bare essentials
- Although we are in a period of risk-on supported by liquidity, in many parts of the world people are focusing on bare essentials
- The easy monetary policy actions adopted by the central banks in many parts of the world to address economic growth
- Potential escalation in geopolitical tensions for whatever reasons, may be a huge negative for the prospects of the global economy
- The possible risk to the inflation trajectory (mainly on account of food)
- And the soaring equity market valuations and limited upside in high-quality bonds
The WGC in its Gold Outlook 2021 also mentions that the investment demand for gold may be well supported this year mainly supported by:
- Ballooning budget deficits
- Concerns about increasing inflation pressures
- Potential correction in the equity market owing to high valuations
In the above scenario, gold will play its role as an effective portfolio diversifier, a hedge (when other asset classes fail to post alluring returns), a safe haven, and command a store of value.
While gold prices may be volatile in the short term it has superior long term value. This highlights the importance of owning gold in the portfolio with a longer investment horizon.
Graph 3: Gold displays is lustre in the long run
Data as on April 22, 2021
(Source: ACE MF, PersonalFN Research)
With pandemic restrictions in place in most parts of the country, buying physical gold may not be a feasible option. Besides, if you wish to invest in gold, doing so in paper form can be more effective. Holding gold in the non-physical form will provide relief to you in terms of the security aspects which is typically associated with holding physical gold. Another big advantage is that you do not have to worry about the quality of the gold.
So be a smart investor and invest in gold through Gold Exchange Traded Funds, Gold Savings Fund, or Sovereign Gold Bonds:
Gold Exchange Traded Funds (ETFs) – Gold ETFs aim to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.
Gold Savings Fund – Gold Savings Fund are mutual funds that invest in gold indirectly through Gold ETFs. Unlike Gold ETFs you don’t require a demat account to trade in Gold savings fund. Investment in a Gold Savings Fund can be done lump sum or through SIP (Systematic Investment Plan), whichever way is convenient for you.
Sovereign Gold Bonds (SGBs) – SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.
Allocate at least 10-15% of your entire investment portfolio to gold and holding it with a long-term investment horizon. It can prove to be an effective portfolio diversifier and a hedge against inflation.
So go ahead and buy gold.
This article first appeared on PersonalFN here
