scorecardresearchShould you invest in gold in a rising inflation regime? What should be

Should you invest in gold in a rising inflation regime? What should be its size in a portfolio? 7 analysts say this

Updated: 15 Feb 2023, 07:54 PM IST

Gold is not only a hedge against inflation, it also is the best bet when there is much uncertainty on the macroeconomic front. Moreover, it adds diversity to your portfolio which is again a major positive.

Gold is a natural hedge against inflation and the ongoing uncertainty in the global monetary system.

Gold is a natural hedge against inflation and the ongoing uncertainty in the global monetary system.

The fresh jump in retail inflation prints surprised many. It reminded us that the war against inflation needs to continue for a long time and central banks have to resort to measures to maintain a balance between growth and rate hikes.

Investors are dealing with a double whammy. While consistent rate hikes by central banks have triggered the risk of an economic slowdown, inflation is yet to come to comfort levels.

Al this is making the outlook for equities weak. And this is when safe-haven assets, such as gold, should catch your attention.

As gold is not only a hedge against inflation, it also is the best bet when there is much uncertainty on the macroeconomic front. Moreover, it adds diversity to your portfolio which is again a major positive.

Is it time to increase exposure to gold? What is the outlook for the yellow metal? How much of your portfolio should be exposed to gold?

MintGenie talked to seven experts to get the answer to these some of the basic questions. Here's what they said:

Rahul Jain, President and Head, Nuvama Wealth

Gold is a natural hedge against inflation and the ongoing uncertainty in the global monetary system. 

In addition to the fear of an impending recession, prolonged geopolitical tensions are expected to keep gold prices elevated. 

The precious metal is viewed as a safe haven and frequently attracts investments in times of uncertainty and economic slowdown.

Every portfolio must include gold. Investors should allocate 5-10 percent of their portfolio to gold. 

It also acts as insurance in the portfolio as the asset of last resort in times of great financial distress. 

That said, investors should also appreciate that, while gold has performed well recently, it cannot be used to replace equities, which have the power to create wealth.

Sanchay Sinha, Country Head - Retail Banking, South Indian Bank

Gold is considered a smart asset class investment to fight inflation when inflation rises because it preserves its purchasing power for long periods. 

So, while stocks and other assets, even currency, may experience large fluctuations, the price of gold may be more stable.

We can observe a high positive correlation between inflation and gold price. 

The demand for gold usually rises whenever there's increased economic uncertainty globally. 

Gold prices are typically tied to the US dollar, so with the US dollar there will be a proportionate rise in the prices of commodities and precious metals such as Gold.

Gold is both a consumer good and an investible asset. Gold is an asset class that gets more valuable with time, and it is the only reason for the appreciation in the price of gold. 

If the panic of the global recession continues to grow with time, the gold price would also appreciate. 

Gold helps create a balance in the portfolio by providing downside protection when equities are not performing well. 

Therefore, investors should invest around 10-15 percent of their portfolio in gold to achieve a better risk-adjusted return.

Manav Modi, Analyst, Commodities & Currencies, Motilal Oswal Financial Services

Gold has seen a great start to this year posting a return of 4 percent in Jan’22 and marking a lifetime high on the domestic front. 

Gold and interest rate has an inverse correlation, hence, any signal from major central banks, regarding a change in the current interest rate hike cycle will positively impact gold prices.

After aggressive rate hike measures from major central banks in 2022, market participants are now expecting a slowdown in the pace of rate hikes which could support gold prices.

Gold is considered a hedge against inflation, hence during the higher inflationary scenario, gold tends to perform well. 

Gold over the past 10 years has given more than 60 percent absolute return in rupee terms, and in terms of CAGR as well, 3, 5, and 15 years of horizon prove to be a good hedge against inflation.

Along with a change in the stance of major central banks, weaker economic data, a rise in fears regarding global growth slowdown, central bank gold buying spree, and rupee depreciation are a few factors which could support gold prices at lower levels.

Consolidation in prices could continue in this quarter, but investors should be ready and accumulate at these dips of 53,000 for the target of 60,000 followed by 63,000.

There are many investment avenues for market participants with respect to gold, along with sovereign gold bonds (SGBs), we also have the option of gold ETF, digital gold, physical gold and trading in the market, depending on the investors' risk profile. 

It is advised for any investor to diversify their portfolio and one should have 7.5-10 percent of gold in their kitty.

Shruti Jain, CSO, Arihant Capital

Historically, gold has been regarded as an inflationary hedge. Investors tend to favour investment in this precious metal when they forecast or witness high inflation rates.

Gold has seen a jump in its prices since the beginning of 2023. Earlier, central bank demand and ongoing geopolitical tensions drove gold’s ascent.

However, major central banks are now slowing down their pace to control inflation. But a falling dollar demand is supporting gold prices.

Key global economies are facing recessionary headwinds, which would lead many central banks to slow their pace of interest rate hikes. This could mean a bounce back for gold prices.

We believe, given the current conditions, there is more room for gold prices to continue their uptrend rally with small corrections.

Our technical desk believes, there could be a rally toward 60,000, which will act as a psychological resistance level. 

A correction may bring the prices down to 53,000- 54,000 levels which will be a good level to accumulate gold for the long term as part of your investment portfolio.

Gold has been long viewed as a safe haven for investors when everything fails. It serves as a hedge against recessions when stocks take a dive, inflation is high, and economies are facing challenges or there is a lot of uncertainty.

Gold can also be a good addition to a well-balanced portfolio for diversification and hedging against a fall in stocks and bonds. It is particularly a good pick for risk-averse investors.

The size of gold in your portfolio depends on your risk tolerance. If you have a good tolerance for risk and are looking for high returns, you would be better off with stocks, provided you can stay invested for the long term.

Inflationary periods and recessions come and go. But given the positive growth outlook of the Indian economy, stocks have the potential to clock better long-term returns.

Prathamesh Mallya, AVP Research, Non-Agro Commodities & Currency, Angel One

When inflation is rising, gold acts as a hedge against inflation and in the rising inflation scenario, gold is the best bet.

We expect gold prices in the international market to head higher towards the $2,100/oz mark by the end of the year. In the domestic markets, 60,000 per 10-gram mark looks very much likely in the same time frame.

One should always be invested in gold for a longer time frame. If the intention is physical gold buying, it is as per the need and the desires of the individual, hence timing the gold prices while physically buying gold is a difficult task. 

One should go ahead and buy physical gold without thinking of the prices falling/rising.

On the contrary, if one is investing in gold from a returns perspective, the best option in the Indian markets is to invest in sovereign gold bonds as it pays interest at regular intervals besides the capital appreciation at the time of maturity.

Those investing in SGBs are aiming at holding the bond till a maturity period of eight years, although one can exit these bonds by selling in the secondary market.

Our advice to investors is to allocate at least 15 percent of the portfolio to gold for better diversification and a good hedge.

Abhijeet Banerjee, Sr. Research Analyst - Commodities, Religare Broking

Gold has started the year on a positive note, in response to the rising inflation concerns, falling dollar value and growing uncertainties in leading global economies.

Historically, periods of high inflation have been positive for gold’s price, as investors tend to flee from fiat currencies towards the yellow metal.

Therefore, the monetary policy-related announcements by the central bank in controlling inflation are a key factor in driving gold’s price.

On the whole, the safe haven demand appeal has returned as the recession fears are likely to persist. This is expected to keep the bullion on the positive track in the forthcoming months.

The outlook for gold is positive from a broader time frame, therefore, we recommend investing in gold.

Technically, we expect gold prices to move closer to 62,000-63,000 level this year. Holding a conservative investment like gold over the long term is largely a practical way to offset riskier investments in one’s portfolio, such as stocks.

Considering gold as a good “hedge” against inflation, we advise allocating 15-20 percent to gold in one's portfolio.

NS Ramaswamy, Head of Commodities, Ventura Securities

Does gold still react to inflation concerns? - The right answer probably is: “When it’s convenient for the market”.

Gold has long been associated with tags such as safe-haven, store of value and inflation-hedge. But it has debunked such connotations and has not been reacting favourably when the market is ripe with inflation fears.

Inflation has a pivotal role to play in the economy and the safe-haven gold. Inflation is very high and likely to stay for a couple of quarters. Gold must eventually reap the benefits of rising inflation.

Gold has an inverse correlation to the dollar, but the outcome of the dollar rising with bond yield is a sign of a higher interest rates scenario to tame inflation.

Gold has crawled out of the hole of $1,800 per ounce in Comex and is now in a range. It has a promising 2023 year to remain bullish and cross the $2000 per ounce mark.

Will Gold move higher, it’s all about data like the US Fed policy (interest rates), inflation or geopolitical event to drive it.

Presently the strength in the dollar and treasury yields has pressurised non-yielding assets like gold for the short term.

If inflation is not seeing any signs of cooling, then the year 2023 remains promising for gold. 

On any indications of the Fed’s action to officially pivot, we would have the US 10-year yield coming down further which could lead the gold prices higher.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of MintGenie.

Investments to beat inflation.
First Published: 15 Feb 2023, 10:45 AM IST