Adding more than just shine to your portfolio, gold’s an essential asset

Mumbai: Gold should remain an essential part of investor portfolios stepping into a seemingly volatile year that will witness the general elections at home and a likely directional change in the rate cycle in the world’s biggest economy.

While the yellow metal may not be at top-of-the-table in terms of returns, its role in portfolio diversification remains critical, wealth advisors said. Gold is seen gaining in high single digits over the next few months.

Safe-haven buying amid a rise in geopolitical tensions has helped gold clock in over 10% gains so far in 2023, even amid a high interest rate scenario, with which gold typically has a negative correlation.

Benchmark equity indices have gained around 7% in the same period, while the yield on the 10-year benchmark government bond eased six basis points to 7.27% on a closing basis.

“We have seen that whenever the Fed is about to pivot, gold tends to do much better over the next six months. So to that extent, gold as an asset class is looking pretty attractive,” said Devender Singhal, fund manager at Kotak Mutual Fund. He suggests investors should give gold a “slightly overweight” position as compared to what they had earlier.

After outperforming other asset classes in 2022, and through the early part of 2023, gold prices saw some moderation for three-four months, before sharply rebounding in October amid heightened geopolitical worries.
The strength in gold was also underpinned by the purchase of gold by central banks globally being at an all-time high of 800 tonnes in the January-September period, up 14% as compared to the previous year.”In the last three calendar years, gold has given double-digit positive returns for two years, and negative returns in one. These are not bad numbers to look at, especially when you consider its low correlation to equity and debt, which makes it a good cushion,” Singhal said.

India’s domestic elections, geopolitical tensions and the US Fed changing its stance to dovish will be the most significant triggers for gold over the next few months. Of this, the US central bank’s actions will, perhaps, be the most critical given the weakening economic growth of the world’s largest economy and its implications globally.

“The pace at which the US Fed turned hawkish, won’t be the same at which it turns neutral or dovish, given that inflation is still playing on the central bank’s mind,” said Naveen Mathur, the director for commodities and currencies at Anand Rathi Shares and Stock Brokers.

A fast pace of reduction in interest rates spells sharper gains for gold given their traditional negative correlation.

“I see gains of around 6-7% or negative returns of around 2-3% for gold, but given that tensions in both Ukraine and Middle East have largely been discounted, there is unlikely to be too much of appreciation or depreciation in gold prices,” he said.