The year 2022 put gold under a bright spot. The precious yellow metal displayed its trait of being a safe haven, a hedge, and a store of value in times when we all have been witness to Russia’s invasion of Ukraine, mounting geopolitical tensions, energy crisis, spiralling inflation (also called rising cost of living), central banks monetary tightening unable to control inflation as envisaged, and the impact of all this on economic growth and stock market volatility.

Graph 1: Performance of gold v/s equity v/s bonds

Graph 1

*Data as of December 19, 2022
MCX spot price of gold used.
(Source: MCX, ACE MF, PersonalFN Research)  

On a year-to-date (YTD) basis, so far gold has clocked an absolute return of +12.7% (as of December 19, 2022) after losing sheen in the calendar year 2021. In other words, proved to be an effective portfolio diversifier in the year 2022, outperforming the Nifty-50 Index and the Crisil Composite Bond Fund Index.

Moving forward, in the year 2023 as well, gold is likely to exhibit its lustre, i.e., continue to turn bolder. Here are factors that shall work in favour of owning gold in the portfolio:

1. Inflationary pressures — While price pressures have eased a bit, they still are remarkably higher than the inflation target rate or comfort levels of central banks, particularly in the U.S. and the Euro Area. And as you know, no central bank would like to keep its eye off inflation as it has a bearing on credit growth and consumption (which are important for economic growth), plus since it shrinks savings.

Graph 2: Inflation scenarios and gold returns

Graph 2

(Source: World Gold Council

The World Gold Council (WGC) sees disinflation ahead in 2023. In other words, prices may come down temporarily to an extent due to further potential rate hikes by central banks but, by and large, inflation will continue to remain elevated.

In a more likely case of stagflation in 2023 (i.e., a period of slowing economic growth, high unemployment and elevated inflation), gold usually fared better than most other asset classes, particularly when inflation is over 6.00% shows the WGC findings.

2. Odds of a Global Slowdown or Recession — Successive and synchronous rate hikes by central banks have not taken the attention of smart investors away from gold. Even amidst a stronger U.S. Dollar (USD), gold has fared well. Now, with the World Bank and International Monetary Fund (IMF)

foreseeing the world edging into a recession in 2023 and a string of financial crises in the emerging market and developing economies, many thoughtful investors are taking refuge in gold.

Do note, amid economic uncertainties, a recession, and weak currency, gold usually tends to perform well (while other assets such as equities and debt come under pressure).

Graph 3: Performance of gold during recessions

Graph 3

(Source: World Gold Council

The WGC findings reveal that in five out of the seven last recessions, gold has delivered positive returns.

Further, as per the WGC’s Gold Outlook 2023, if a severe downside with stagflation is witnessed in 2023, gold may have significant upside potential, but if it is a mild recession (i.e., a scenario where inflation halves, the USD weakens, bond yields move slightly higher, China opens in H1CY23, geopolitical tensions remain, etc.) — which is a broader consensus scenario — gold may remain stable with some upside potential.

3. Simmering geopolitical tensions — In many other parts of the world, geopolitical tensions are escalating. It’s been nearly ten months since Russia invaded Ukraine, and it doesn’t seem to be ending soon. On the contrary, Russia has increased its aggression striking heavily at Ukraine.

Similarly, North Korea has escalated aggression against the U.S. (by launching as many as 85 missiles this year as reported by The New York Times), passing on a message to the navy drill between the U.S. and South Korea.

China-Taiwan relations aren’t good, and there are fresh tensions between the two. China is preparing to find fresh “pretext for practising future attacks,” said Taiwan’s foreign minister, Joseph Wu, speaking to the media.

China is also intimidating India with its build-up and troops entering the disputed areas near the Line of Actual Control (LAC). India also continues to deal with infiltration from Pakistan at the Line of Control (LOC). This apart, in the Middle East and North African (MENA) region, there are conflicts.

In such times of geopolitical tensions, which could prove perilous for society, policy and the global economy, gold as an asset class is likely to do well. The RBI has warned that unabated geopolitical tensions may continue to impart uncertainty to the food and energy prices outlook.

Graph 4: Geopolitical Threat Index

Graph 4

(Source: World Gold Council

According to the WGC, if geopolitical tensions flare up, it could lend support to gold investment, as we saw in Q1’22. The current resilience shown by gold in 2022 can be largely attributed to the geopolitical risk premium, observes the WGC.

4. Stock market volatility — If 2023 indeed turns out to be a year of stagflation, a slowdown or a recession (of whatever degree), it may weigh down on corporate earnings stock markets.

Graph 5: Impact of recession on corporate earnings

Graph 5

(Source: World Gold Council

The WGC study for its Gold Outlook 2023 reveals how recessions of the past have impacted the earnings of companies. And when that happens, the stock market usually turns turbulent and corrects. In such an environment, it is gold that exhibits sheen, proving to be a portfolio diversifier.

Read: 5 Best Equity Mutual Funds for SIPs in 2023

5. Central are likely to buy gold in 2023 — As you may know, gold plays an important part in central banks’ reserves management. Sensing the macroeconomic risk, most central banks (including the RBI) would continue to buy gold in 2023 and increase the holding as a percentage of their international reserves.

In a variety of our editorials in 2022 — be it around Gudi PadwaDussehra (the auspicious muhurats to buy gold) — and even otherwise, we often highlighted why you must own gold.

Once again, I reiterate tactically add gold to your investment portfolio. The uncertainties surrounding growth expectations for 2023 make a case for investing in gold. A fact is unlike financial assets, gold is a real asset –meaning gold does not carry credit or counterparty risk. Also, the precious yellow metal is symbolic of Goddess Lakshmi, a mark of wealth, highly liquid (a new currency), a shield against inflation, and an asset that can be passed on to generations.

Graph 6: Gold has displayed its lustre in the long run

Graph 6

*Data as of December 19, 2022
MCX spot price of gold used.
(Source: MCX, ACE MF, PersonalFN Research) 

The long-term secular uptrend gold has exhibited cannot be ignored and highlights the importance of owning gold in the portfolio. In the last decade, gold has clocked a CAGR of nearly 6% as of December 19, 2022.

Just as the way gold yielded positive double-digit returns in 2019, 2020, and 2022, in 2023 as well, we can expect gold to do well.

Therefore, approach gold strategically. Allocate around 15-20% of your entire investment portfolio to gold and hold it with a long-term investment horizon (of over 5 to 10 years) by assuming moderately high risk.

For investment purposes, prefer Gold ETFs and/or Gold Savings Funds–the smart ways of investing in gold. Alternatively, you may also consider investing in Sovereign Gold Bonds (SGBs), wherein you earn a fixed interest during the eight-year maturity period as well as benefit from the potential capital appreciation of gold. Currently, Sovereign Gold Bond 2022-23: Series III are open for investments.

This article first appeared on PersonalFN here

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