The end of last week brought with it an unexpected geopolitical storm in the form of the Israel–Hamas conflict. This concerning development comes in the aftermath of the ongoing Russia-Ukraine turmoil, which has played a major role in pushing up inflation across global economies, owing to the rise in oil prices.
Further, with the Middle East being a major source of oil for global economies, the Israel-Hamas situation is prompting oil prices to surge, triggering fears of an even greater rise in inflation. This, coupled with the ongoing quantitative tightening being undertaken by global central banks, is expected to set off another rate hike cycle in the near future. In this fraught scenario, the equity market sentiment has soured.
Safe haven considerations
During situations of geopolitical unrest, most investors tend to seek refuge in safe haven asset classes such as gold and this event is no different. Since the news of the latest geopolitical conflict, the yellow metal has witnessed its global prices surging to their highest weekly levels, with spot gold attaining USD 1,865.19 per ounce, and US gold futures rising by 0.5% to settle at USD 1,874.10.
The precious metal’s enduring allure is rooted in its historical role as a store of value and a hedge against uncertainty and therefore, when geopolitical tensions escalate, investors often seek refuge in gold because it tends to retain its value over time. Unlike paper currencies, which can be devalued by inflation or political instability, gold remains a tangible and universally accepted form of wealth.
Further, gold has a low correlation with other financial assets, such as stocks and bonds, meaning that when geopolitics causes stock markets to decline, gold's price tends to rise, making it a valuable diversification tool for investors looking to mitigate risks.
Separately, geopolitical turmoil can lead to economic instability and uncertainty and, in such scenarios, gold serves as a hedge, providing investors with a safe and liquid asset that can be readily converted into cash when needed. The precious metal’s global acceptance also makes gold attractive to investors as the metal has, throughout history, proven its worth during times of war, political upheaval, and economic crises.
So, how should one invest in gold? To begin with, there are a variety of avenues available in the form of gold jewellery, coins, bullions, gold mutual funds, gold exchange-traded funds (ETF) and sovereign gold bonds. Among these, the gold ETF is one of the most convenient. The ETFs are designed to closely mirror the price movements of the metal, making them effective instruments for capitalizing on commodity price appreciation. Gold ETFs provide exposure to the yellow metal without the challenge of physical ownership.
For a lay investor, the process of buying units of gold ETFs is similar to buying stocks, ensuring easy investment and liquidation during the trading hours. There are no storage and insurance expenses associated as gold ETFs are held in a demat account.
Further, gold ETF does not attract taxes liable on physical gold, excluding capital gains at the time of sale. Finally, you can begin gold ETF investments with a small financial commitment, unlike purchasing expensive physical gold.
To conclude, even as the market is hopeful of a speedy resolution in the latest geopolitical crisis, investors could consider having a 10% allocation to gold, in a concerted attempt to ride out the gathering storm.
Chintan Haria, Head Investment Strategy at ICICI Prudential Asset Management Company Limited