Why Investing in Gold This Dussehra Would Be a Good Idea

Oct 18, 2023 / Reading Time: Approx. 9 mins

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Why Investing in Gold This Dussehra Would Be a Good Idea

India currently is the 2nd largest consumer of gold, following China. This is no surprise given that we are a land of festivals, numerous customs, and traditions, wherein the precious yellow metal plays a fundamental role in our cultural heritage.

The rural and elderly population, particularly, have a profound penchant for gold (as an asset class), and they enthusiastically indulge in purchasing it during auspicious muhurats. Among the many auspicious gold-buying muhurats, are festivals like Dussehra and Dhanteras.

Dussehra, also known as Vijayadashmi, (celebrated to commemorate the triumph of good over evil) is considered a propitious day to start a new venture, buy a high-value asset, and invest in gold - considered to be eternal wealth. It is believed that a new investment on this day will usher in good fortunes and the blessings of Goddess Laksmi.

Here's why you should consider investing in gold this Dusshera, watch this video

 

Well, like in the year 2022, when gold was in the spotlight on account of factors such as Russia's invasion of Ukraine, Indo-China tensions, curdled relations between the U.S. and China, disputes involving China and Taiwan, supply chain disruptions, energy crisis, rising inflation, the inability of central banks to tame inflation as expected, stagflation, and the record-high global public debt, among other factors; this year in 2023 and beyond, gold is likely to exhibit is lustre.

The following conditions make a case for investing in gold in 2023:

  • The Israel-Gaza War and the possibility of it widening with many other Middle Eastern and other nations getting involved.

  • Simmering geopolitical tensions among other countries, i.e. between the U.S. and China, Taiwan and China, India and China, Pakistan and India, North Korea and South Korea, among others.

  • Geopolitics and geoeconomic fragmentation are emerging as serious a threat to the macro-financial stability, as warned by the IMF.

  • Risk to the inflation trajectory owing to supply chain disruptions.

  • Possibility of a Super El Nino next year (as warned by the U.S. weather agency) pushing up food prices.

  • Chance of international oil prices moving higher owing to tensions in the Middle East.

  • Central banks have kept policy interest rates high but have been unable to bring inflation within their comfort range.

  • There are chances that the global economy may slow down later this year (or early 2024).

  • The likelihood of higher borrowing costs, endangering the recovery of bank loans in case of an economic slowdown and leaving them with insufficient capital buffer. As per the IMF, there are many more weak banks in the advanced economies than in the emerging markets.

  • The burgeoning debt-to-GDP ratio of many major economies - higher than the pre-pandemic levels.

  • Increased volatility in the financial market.

The Reserve Bank of India (RBI) also has warned that the balance of risks around the global outlook has tilted to the downside, with geopolitical risks having risen in recent months, although, at present, global supply chain pressures remain below their historical average level in August 2023.

Graph 1A and 1B: Geopolitical risk and supply chain pressures

(Source: RBI Bulletin, September 2023)
 

Moreover, financial conditions have tightened across economies such as the U.S., U.K., the EU, and China, which could weigh on growth. The RBI's Systemic Risk Survey also point to many of the aforesaid risk, including climate change.

Considering these risks, central banks too aren't taking chances; they are adding gold to their reserves.

Graph 2: Top-10 Countries Stacking Up Gold

International Financial Statistic data of the IMF as of October 2023 edition and other sources where applicable. IFS data are two months in arrears, so holdings are as of August 2023 for most countries, and July 2023 or earlier for late reporters.
*The percentage share held in gold of total foreign reserves, as calculated by the World Gold Council.
(Source: World Gold Council)
 

Gold, as you may know, plays an important role in the central bank's reserve management because of its safety, liquidity, and return characteristics. It is looked up to as a store of value and a safe haven in times of economic uncertainties.

In my view, even the higher policy interest rates and higher treasury yields are elevated, may not deter smart investors from approaching gold.

Note that higher yields are also reflective of inflation volatility and other economic uncertainties. A fact is that higher yields are also constricting financial conditions, which potentially increases the chances of an economic slowdown or recession over the next few months.

Table: Macroeconomic scenarios and implications for Gold

(Source: Gold.org)
 

According to the World Gold Council's (WGC) Mid-year Outlook 2023, if the recession risk increases, gold could see a greater upside (as usually such periods bring about higher volatility in the financial markets and increases the appetite for high-quality and liquid asset such as gold.) The graph below reveals how gold has fared during recessionary periods.

Graph 3: Performance of Gold Amidst Recessionary Periods

Past performance is not indicative of the future.
(Source: Gold.org)
 

As far as the Indian economy is concerned, with it holding up remarkably better than many others in the emerging markets and advanced economies and perceived to be a 'bright spot', local demand for gold would remain buoyant, particularly during the festive and wedding season.

From an investment standpoint, it also makes sense to own gold in your portfolio. The graph below indicates that not all asset classes always move in the same direction (up or down).

Graph 4: Performance of Equity, Debt, and Gold in the respective calendar years

Data as of October 16, 2023.
Past performance is not indicative of the future.
(Source: ACE MF, MCX, data collated by PersonalFN Research Research)
 

There have been years when equities have disappointed investors -- like in the years 2015, 2018, and 2022 -- and when gold has played its role of being an effective portfolio diversifier.

In the current calendar year 2023, on a year-to-date (YTD) basis, gold has delivered +7.9% absolute returns (as of October 16, 2023).

Since the peak (of Rs 61,346 per 10 grams made on May 24, 2023), gold has retraced -4%. Taking this into account and looming global economic uncertainties and geopolitical tensions, it makes sense to tactically allocate to gold.

A fact is unlike financial assets, gold is a real asset -- meaning gold does not carry credit or counterparty risk.

[Read: Why You Must Own Gold]

How much to allocate to gold?

Strategically allocate around 10% to 15% of your entire investment portfolio towards gold and hold with a long-term view (of over 5 to 10 years) by assuming moderately high risk.

Graph 5: Gold Has Displayed Its Lustre Over the Long Term

Data as of October 16, 2023
Past performance is not indicative of the future.
(Source: MCX, data collated by PersonalFN Research Research)
 

Over the long term, gold has delivered decent returns. In the last decade, gold has clocked a CAGR of nearly +7.0%, whereas since India's independence, a CAGR of nearly +9.0% (as of October 16, 2023).

Preferably invest in gold the smart way --in the form of Gold ETFs, Gold Savings Funds, and/or Sovereign Gold Bonds.

Gold ETFs and/or Gold Saving Funds, in particular, are a convenient, cost-effective, transparent, liquid, flexible, and hassle-free way to own gold in your portfolio.

Speaking about Gold ETFs, they are backed by 0.995 finesse gold, can be safely held in a demat form, and are better aligned to the price of physical gold. They generate returns broadly in line with the domestic price of gold.

Similarly, Gold Saving Funds invest in underlying Gold ETFs, which benchmark the performance against the prices of physical gold. Gold Saving Funds strive to produce parallel returns that closely resemble the underlying Gold ETF. To invest in a Gold Savings Fund, you are not required to have a Demat account. The units of Gold Saving Funds can be purchased through a mutual fund distributor or directly from the fund house.

Some may say these are "paper units". Surely, they are, but your money is invested (by the fund manager) in actual/real gold, and thus, when the price of physical gold rises, it influences the performance of gold mutual funds.

[Read: All You Need to Know About Gold Mutual Funds].

Considering all the impending risks involved, be a thoughtful investor and buy gold on the auspicious muhurat of Dussehra 2023. It would serve as a sensible hedge in your portfolio.

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ROUNAQ NEROY heads the content activity at PersonalFN and is the Chief Editor of PersonalFN’s newsletter, The Daily Wealth Letter.
As the co-editor of premium services, viz. Investment Ideas Note, the Multi-Asset Corner Report, and the Retire Rich Report; Rounaq brings forth potentially the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.
He has also authored and been the voice of PersonalFN’s e-learning course -- which aims at helping investors become their own financial planners. Besides, he actively contributes to a variety of issues of Money Simplified, PersonalFN’s e-guides in the endeavour and passion to educate investors.
He is a post-graduate in commerce (M. Com), with an MBA in Finance, and a gold medallist in Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq holds over 18+ years of experience in the financial services industry.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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