Home/ Markets / Commodities/  Gold not the best investment currently, but a long-term hedge; should you sell?

The gold price in India touch a new high of 60,000 in the recent days and has maintained around that level on the back of fears around global banking crisis and higher dollar. On Wednesday, US Fed increased interest rate by 25 bps in line with market expectations. This further boosted the gold rates in the international market. 

While lingering credit concerns may continue to support gold prices in near term, the yellow metal may not rally much from the current level on a sustainable basis. Gold is expected to gravitate slowly lower back to $1850-$1875 in the coming months, said Praveen Singh – AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas.

Here are the edited excerpts from his interview with Mint's Rakshita Madan. In an e-mail interview, he talks about gold as an asset class, what your portfolio allocation should be: 

1. How will the developments from the Fed meeting affect the gold prices?

The US Federal Reserve hiked the Fed fund rates by 25 bps to 4.75% to 5% range. Considering the fact that many economists expected a pause at this meeting, the hike belied any such dovish expectations. Mr Powell called the US Banking system as solid. He indicated that going forward, rate decisions will be data dependent.

The Fed Chair added that some members of the committee view the turbulence in the banking system tantamount to additional financial tightening, thus reducing the need for some tightening. He further said that some additional policy firming may be appropriate, which was a deviation from his usual remark that ongoing increases in the target range will be appropriate.

Some sections of the markets, especially bonds and currencies, have construed his last two points as dovish. As a reaction, US yields tumbled hard, thus pressurising the US Dollar. US Treasury Secretary Janet Yellen's comment that they are not considering broad increase in deposit insurance made it worse for the Dollar and yields. Gold took its clues from rally in bonds as Dollar fell to six-week low.

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While lingering credit concerns may continue to support gold prices in near term, the yellow metal may not rally much from the current level on a sustainable basis. Gold is expected to gravitate slowly lower back to $1850-$1875 in coming months as the Federal Reserve pivot expectations are misplaced. Inflation control continues to be the Federal Reserve's and other major central banks priority. Their fight against inflation is a question of their credibility which has taken a huge hit when these central bankers maintained inflation-is-temporary stance for such a long time.

Overall, unless new credit event occurs or economies are subjected to a material risk, gold may not rally much on a sustainable basis, though on a long term horizon, the metal does have bright prospects.

2. Does it make sense to invest in gold at such high levels?

At current rate of gold at $1965/Oz or 60,000 per 10 gram for 24-carat gold amid global interest rates still marching higher and elevated inflation and the US economy doing reasonably well, it is hard to make a strong case for investment in gold. The US job sector as indicated by low unemployment rate of 3.60%, employers adding solid number of jobs, and strong JOLTs openings is still going strong, which basically indicates that upward pressure on inflation will continue to remain in place. Ex-housing services component of the US inflation is quite sticky. The US ISM non-manufacturing data for February coming in at 55.10 and price paid component of US ISM manufacturing bouncing back in the expansion zone, inflation may not come to the Fed's desired level of 2% any time soon.

Also read: Gold price jumps as US dollar hits 7-week low on US Fed rate hike

With both European Central Bank and the US Federal Reserve hiking rates despite global banking turmoil shows that the Central Banks are not willing to allow for any let ups in their fight against inflation.

Gold is not really a convincing inflation hedge as it can protect against inflation only when the central banks are behind the curve in reining in inflationary expectations.

Gold does well especially during credit stress and credit contagion risk scenarios. With prominent central banks and the concerned governments taking swift and strong actions to contain credit risk contagion, concerns about the global banking system may continue to linger for some time, but the overall situation doesn't look so disastrous any more. It is more about liquidity, shaky confidence, and a lack of proper risk mechanism rather than a systematic risk.

So, gold may slowly gyrate lower in coming weeks.

3. Which form of Gold should investors look at while investing in Gold?

While investing in gold may not be the best investment options currently, investors should definitely have gold in their portfolios as an insurance to safeguard them against any Black Swan event risk. Sudden eruption of the present global banking crisis is a case in point. Corporates used to extremely low interest rates for so many years may find it difficult to manage risk coming with rates moving higher at such a blinding pace. Even the US Federal Reserve Chair Powell is also concerned about the present crisis. This, importance of gold as an insurance instrument in investors' portfolios can't be emphasized enough.

Sovereign gold bond is a good option to invest in gold. It doesn't attract taxes if an investor holds it for the entire maturity period of eight years. There is virtually no key cost. Physical and digital gold have high buy-sell spread as a negative point. Digital gold lags on regulatory count, too.

4. What portion of portfolio should be gold right now?

As a thumb rule, investors should allocate 5%-15% of their investments to gold as an insurance to their portfolios. Depending on the risk scenario, as is the situation currently, it could be in the high end of the said range as gold has low correlation with other asset classes.

5. Should investors book some profits at the levels of 60k?

If investors have bought gold as an insurance, they should continue to hold it as they should always allocate a part of their investments to gold for hedging. If they have bought it for investment purpose, they may book at least partial profit so that they may add to their gold position at lower rate.




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Updated: 23 Mar 2023, 09:20 AM IST
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