Is it time to take a relook at gold funds?

From 25-30% returns in August-September 2020, gold exchange-traded funds (ETFs) are now showing returns of around -7% on a one-year basis. The performance in gold over the past 18 months could have either led you to exit the asset class or nudge you to increase your allocation at lower prices. According to experts, it all depends on whether you view gold as a tactical or strategic asset.

“Gold was already in a bull phase before covid-19 struck, which further accelerated investment and hedging demand. However, due to supply chain issues, lower physical offtake due to lower jewellery demand and negative investment demand resulted in market overhang this year, resulting in correction in prices," said Vikram Dhawan, head - commodities and fund manager, Nippon India Mutual Fund.

However, things may be improving for the yellow metal. According to a report by the World Gold Council (WGC), holdings in Indian gold ETFs hit their highest level since September 2013, driven by heightened stock market volatility and a correction in domestic gold prices. Indian gold ETFs witnessed net inflows of $68.3 million during September, taking year-to-date flows to $433 million.

The WGC report also showed that Nippon India ETF Gold BeES, which is India’s biggest gold fund with assets over ₹6,000 crore, added 0.5 tonnes or $31 million worth gold during September. Despite being in the red in 2021, Nippon India’s Gold ETF, launched in 2007, has given returns in excess of 10% per annum since inception.

Additionally, a recent report by Acuité Ratings & Research Ltd showed that India’s gold imports was at a decade high level in the first half of FY22, as a mild correction in domestic gold prices by 2.7% from the peak seen in May further provided a fillip to domestic gold demand. “It is also likely that a part of increased household savings in the higher income categories are being partly deployed in physical gold as it has been traditionally considered to be a safe haven in an environment where the risks of the pandemic continue to exist," said Suman Chowdhury, chief analytical officer, Acuité.

Another factor that is working in the favour of gold is inflation. While the covid-era ultra-accommodative monetary and fiscal stimulus measures helped bring back consumer demand, they have thrown up a new challenge. As per a recent note by Quantum AMC, global supply chains, disrupted by the pandemic haven’t been able to match up to the rebound in demand, resulting in prices of goods and services going up.

At the same time, major developed countries such as the US and UK are seeing fewer people returning to their jobs post the pandemic, which is pushing wages up. Energy prices too have been on the rise as supply accommodates the pent-up demand, pushing up transportation costs of all goods and commodities.

“All of this is translating to higher global inflation. Gold prices have historically been in line with inflation," said Chirag Mehta, senior fund manager, Quantum AMC. As per the WGC, for each 1% increase in inflation from 1990 to 2020, Indian gold demand increased by 2.6%, proving that Indians have used gold to tackle higher inflation. Mehta believes that prevalence of these economic risks demands a 10-15% allocation to gold, which, unlike other mainstream assets, tends to benefit during times of stress and uncertainty, cushioning the overall impact on the portfolio.

Experts say that gold is a diversification and hedging play. Moreover, based on historic data, gold is poorly or negatively correlated with risk assets. Priti Rathi Gupta, founder, LXME, a financial platform for women, suggests that gold should ideally be 5-10% of your portfolio, depending on factors such as age, size on investment portfolio, financial goals and time horizon of investment.

“For a 25-year-old, who is just starting his/her investment journey, gold may not be an attractive investment option compared with equities for growth and debt for ultra-short to short-term goals. On the other hand, someone at the age of 40, with a fairly decent investment portfolio, should invest about 5% of their portfolio in gold," said Gupta.

Like all major asset classes, gold too undergoes bull, bear and consolidation phases. Investors seeking exposure to gold for a longer period or for diversifying their portfolios often use the volatility to their advantage.

While investment demand has been a mixed bag this year, physical demand is recovering, and the central bank buying has also been steady this year. Moreover, the possibility of higher and stickier than expected inflation may propel investment demand for hard assets and gold may benefit from it. While past performances are no guarantees of future returns, experts believe that gold’s track record is hard to ignore.