scorecardresearchHow adding gold ETFs to your portfolio helps you tide through volatility

How adding gold ETFs to your portfolio helps you tide through volatility

Updated: 29 Aug 2023, 04:48 PM IST

Gold demand remains strong as central banks buy gold for risk mitigation and reserve management. Gold is a good hedge against inflation and volatility, and can provide diversification and downside protection in uncertain times.

Gold ETFs offer a convenient and cost-effective way to invest in gold.

Gold ETFs offer a convenient and cost-effective way to invest in gold.

Global challenges such as elevated inflation, economic uncertainty and simmering geopolitical tensions continue to prevail. In addition, the continued crisis of confidence in the US regional banks is unnerving investors. Against this backdrop, stock market volatility is likely to persist. In such a situation, having an exposure to an asset class like gold could be helpful.

Case for investing in gold strategically

As per the World Gold Council’s (WGC) latest Gold Demand Trends report, gold demand is expected to remain strong throughout the year. This is partly because several central banks are buying gold as a risk mitigation measure and as a part of their reserve management.

This comes at a time when retail inflation continues to remain above the target range of most central banks, although there has been a slight moderation in inflation levels over the past few months. Some of the factors adding to inflationary risk include uncertain crude oil price trajectory, climate changes bringing unseasonal rains and hailstorms, geopolitical tensions, etc. Historical trends show that gold as an asset class has proven to be the best hedge against inflation, by comfortably beating inflation in 13 out of the past 17 calendar years.

Aspects such as recession fears in developed markets, a meltdown in economic activity in the US, de-dollarisation narrative, import inflation, and supply and demand dynamics are also in favour of gold. Further, gold's role as a long-term, strategic asset could take the centre stage as it has a history of delivering positive returns in the last five of seven recessions.

When compared to popular investment avenue like equity, gold tends to be relatively less volatile in nature. Data shows that gold and equity markets have an inverse correlation. Given this nature, having exposure to gold is considered as a part of the asset allocation practice. At a time when equity markets tend to be volatile, the presence of gold in the portfolio aids in reducing the overall portfolio volatility. As a result, gold remains an attractive asset class especially during times of uncertainty. One of the efficient ways to invest in gold from a portfolio perspective is through Gold ETFs (exchange-traded funds).

What are Gold ETFs?

Gold ETFs are passive investment instruments that aim to track the price of physical gold. So when an investor is buying gold ETF, he is essentially investing in gold in electronic form. Each unit of gold ETF is backed by physical gold with a purity of 99% or more. Since these units are listed on exchanges, one can buy and sell them during the trading hour just like a stock. There is complete transparency in prices and the units are held in demat form. In case if an individual does not have a demat account, they may consider investing via fund-of-fund route.

Given the nature of gold ETF, it aids in circumventing several of the shortcomings of holding physical gold such as concerns about the purity of gold, safety, storage, liquidity to name a few. Another advantage of gold ETF is that one need not wait to accumulate sizeable money to make a gold purchase. Here, an investor can buy one unit for an approximate price of Rs. 54. As a result, gold ETF becomes a convenient, cost-effective, transparent, liquid, flexible, and a hassle-free way to own gold in your portfolio.

At a time when uncertainty abounds, gold can be a safe haven, providing diversification and downside protection for investors’ portfolios. After all, gold is a well-meaning addition to any portfolio given its proven investment potential. Investors can consider allocating up to 10% of the portfolio to the yellow metal. By investing in gold ETFs, you can enjoy all the benefits of gold without physically possessing the metal.


Chintan Haria is Head of Investment Strategy at ICICI Prudential AMC.


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First Published: 29 Aug 2023, 04:32 PM IST