Inflation is affecting economies all over the world. The International Monetary Fund (IMF) estimates that contraction will happen in more than one-third of the global economy. However, the Indian economy is being resilient but the battle against inflation is not yet over. It is important for investors to invest in those asset classes which can deliver returns higher than that of the inflation rate. One such asset class is gold. Let us discuss the same in detail.
Good hedge against inflation and recession
Gold is considered a smart way to fight against inflation because it tends to hold its value and preserves your purchasing power over the long haul, despite fluctuations even in the currency. New year is a good time to increase allocations to gold.
Empirically, over a longer period of time, it has been proved that gold has been a good hedge against inflation. When an economy slumps into a recession, the stock market also slows down and real estate investments can also possibly lose value during that time. In such a scenario investing in gold can be a good way to ensure a diverse portfolio and thus reduce your exposure to these riskier assets, and minimise the impact of any losses.
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Central banks likely to buy more gold
Gold plays an important part in central banks’ reserves management system. Sensing the uncertainties and associated macroeconomic risk, most of the central banks including RBI are likely to continue to buy gold in 2023 and increase the holding as a percentage of their international reserves. The uncertainties surrounding growth expectations for 2023 make a case for investing in gold.
The fact is that unlike financial assets, gold is a real asset which involves no credit risk or counterparty risk. Gold yielded positive double digit returns in 2019, 2020, and 2022, in 2023 as well, one can expect gold to do well. Therefore, investors should approach gold strategically.
Type of gold investment vehicle
Instead of simply buying solid gold investors should possibly consider the following alternatives.
Gold ETFs or Gold mutual funds
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In case of Gold Exchange Traded Funds (ETFs), investors need to have a demat account whereas in case of gold mutual funds it is not required. Gold mutual funds give the investor an option to invest through a SIP that makes the investment more affordable and disciplined. Change in the price of gold directly affects the prices of Gold ETFs but change in the price of gold does not affect Gold MFs directly. Investing in solid gold such as gold coins, or bars lead to the risk of theft or concerns regarding storage.
Investing in solid gold items is best suited to the investors with conventional tastes in investments. They could possibly consider the gold schemes offered by the jewellers of repute. Under this scheme an investor has to invest a certain amount in the gold scheme, just like a SIP, for a certain period of time. After maturity, an investor has a lump sum amount, with which they can purchase jewellery with certain associated benefits such as no making charges, wastage, etc.
But investors should go for a gold scheme option only from reputed jewellers who have a very good track record. In such schemes, probability of default risk should be taken into account before investing. Sovereign Gold Bonds were introduced by the government of India in the year 2015 under the supervision of the Reserve Bank of India. The objective is to offer an alternative option for investment in solid gold. Generally, it comes with a five year lock-in period.
To conclude, gold is a smart investment for some but it may not be the right asset for everyone. If maximising your investments’ growth is a priority, then gold is probably not for those investors. Gold is typically considered a low-risk, safe haven investment but not one that offers high returns.
The writer is a professor of finance & accounting at IIM Tiruchirappalli