The yellow zone is not safe! Why gold is falling out of favour as a safe-haven

New Delhi: Amid the rising inflation, the best hedge against inflation is running out of favour. Gold is not the first choice for investors to make or save their fortunes in these tough times.

The rising bond yields and stronger dollars are denting the yellow bullion’s appeal as investors will have to pay more for the safe haven, which does not yield anything on its own.

As the tailwinds and headwinds rollout, the gold has lost its ‘safety’ lustre and has remained range-bound over the last two months. However, the backers of the gold say that it is considered a valuable asset that never goes out of trend.

In 16 countries, first-quarter inflation was more than four times higher than a year ago. Market participants blame the super-high inflation for the muted performance of the gold, akin to other asset classes.

A report from Organisation for Economic Co-operation and Development (OECD) suggests that the average annual inflation rate in the first quarter of this year was at least double of what it was in the first quarter of 2020 when COVID-19 was just getting started.

Rahul Kalantri, VP Commodities, Mehta Equities, said that gold was considered to be a safe haven at the time of high market volatility, but it seems to have forgotten its role and has started falling in line with equity markets.

Other experts said that gold remained an outperformer amid the geopolitical tension and rising inflation hitting most asset classes, gold stands out as a safe bet in a volatile world, considering the absolute return from debt and equity.

Prithviraj Kothari, Managing Director of RiddhiSiddhi Bullions (RSBL), said that after decades of huge deficit spending and ultra-easy monetary policy, we are finally on the verge of stagflation.

“The appeal of gold and silver as safe-haven assets is not diminished in this climate, but the hawkish Fed, rising real rates, and a relatively strong dollar backdrop are among the factors weighing on bullion for a short time,” Kothari said.

Real interest rates in US dollars are key factors to determine the gold prices. The yellow metals shine in a low real interest rate environment. Global demand-supply chain, future guidance of interest rates and inflation also impact the bullion prices.

In the post-pandemic world, supply chain disruption, labour shortages, and the war crisis between Russia- Ukraine have all contributed to a substantial increase in inflation in recent months, hurting the bullion’s appeal.

Gaurav Mathur, founder and managing director, SafeGold, a digital gold platform, said that looking at history, gold has done well in times of high inflation and uncertainty when most other asset classes tend to lose value.

“For Indian investors, gold also provides a natural hedge against the depreciation of the rupee,” Mathur said. “Over longer periods, gold has proved to be a better asset than bank deposits across most countries,” he added.

With the upsurge in the interest rates, money will move out from gold into bonds. However, the non-yielding bullion has remained range-bound, with traders baffled.

“However, key investors with big positions in gold know that the economic outlook is still challenging and still prefer to hold bullion as a safe-haven asset,” said Kalantari. “We have a positive view on gold and suggest staying in gold,” he added.

Fear among the investors is quite heightened at the current point in time, who fear a recession ahead. Even the hopes and expectations of recovery are quite dim considering the current economic gloom.

“Whether we look at digital gold, sovereign gold or ETFs, all of them generally move in line with gold prices,” said SafeGold’s Mathur. “Choice of instrument depends on a customer’s view on liquidity, annual fees and option to get physical gold,” he added.

Market experts suggest that investors should not change their investment thesis or juggle with asset allocation over the market fluctuations. One should invest up to 10 per cent of their portfolio in the yellow metal to tide the tough times in the longer run.

The best way to stay invested in the yellow metal is through digital gold SIP, the smartest, safest and easiest way to accumulate the metal in the purest form, suggests Kothari from RSBL. “One can buy in small amounts every month,” he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)