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How to invest in gold when prices ride high

Gold prices at record levels: Lately, inflation seems to be cooling and the pace of rate hikes might slow down and eventually stop in 2023-24. This will bode well for gold in future

Gold prices are soaring. In fact, they are near all-time highs. And this is resulting in conversation once again arising on whether or not to invest in gold.

Not so long ago, gold prices had fallen 20% or so. At that time, it made eminent sense to start allocating more funds to gold. But what should be done now when gold prices are near historical peaks? That is not to say that it cannot go further up, though.


First, let’s see what factors may influence gold prices, going forward.


Positive outlook for 2023

Things seem positively aligned for gold, going forward, because:

- There is a reasonable probability that many developed countries will see muted growth or even mild to moderate recession (positive for gold)

- The financial markets were negatively volatile last year and this might well continue in 2023 as well (positive for gold)

- Almost all the major central banks across the world have been raising interest rates to fight inflation. Rising rates have muted gold prices, but given that inflation does seem to be slowing down, chances are that rate hikes will also slow down gradually and then eventually stop in 2023-24 (neutral-negative initially and then positive for gold)

- Let’s not forget geopolitics. Russia-Ukraine surprisingly are still at each other’s throats and we cannot rule out more countries joining them more openly or other fronts opening up (positive for gold)

- Many central banks are also adding gold to their treasury to reduce dependence on foreign reserves (positive for gold)

- The reality-check on the crypto markets had made investors realise that all talk about crypto replacing gold was just that, talk (positive for gold)

Also Read: 2023 may be a do-or-die year for cryptos. Are investors prepared?

Given these factors and assuming interest rates aren’t hiked too much, it does seem that things might get good for gold in the next few quarters. But no one can predict anything with 100 percent surety.

This is just a view based on the prevailing conditions and influencing factors. Gold is known to do well in recessionary times, as it is considered a safe haven for bad times.

But we also need to keep in mind that gold is not like other asset classes that can be valued based on their cashflows or intrinsic value. Gold prices are dependent on the supply-demand equation and factors like geopolitical events, global economy, etc. impacting the supply-demand equation. And because of this, gold prices tend to stay dormant for extended periods of time, followed by a sudden and volatile spurt in prices.

Role of gold in portfolios

Having a 5-15 percent allocation to gold is a prudent approach towards long-term portfolio management. And while 5 percent or lower may be too small to bear any material impact on the overall returns or risk, it shouldn’t also have more than 15 percent allocation.

Remember, gold should not be treated as a core asset like equity or debt in your portfolio. It’s more of a diversifier and a natural hedge for the portfolio.

How to invest in gold at near all-time highs?

While the outlook for gold is positive in a chaotic environment, that doesn’t mean you go all-in for gold and bet big on the yellow metal.

You might be tempted to ride the momentum in gold prices and invest a large sum. But don’t invest in gold or anything just because prices have been rising in the recent past. Trying to invest in lumpsum will open you to the risk of getting your entry timing wrong.


Consider your portfolio’s asset allocation first. If your allocation is already near the middle (10 percent) of the suggested 5-15 percent band, then there is nothing much to do for you. But if the allocation is lower than what is ideal for your portfolio, then you can increase the allocation to gold in your portfolio gradually. Therefore, let your asset allocation strategy decide how much to invest in gold at any given point in time, rather than get unduly influenced by the performance of the last few months.


Investors looking at gold for the long term (with no tax on profits but also low liquidity), can consider investments in sovereign gold bonds (SGBs). Others can look at gold exchange-traded funds (ETFs) or gold funds to gradually scale up their exposure to gold.




Courtesy - MONEY CONTROL

Link - https://www.moneycontrol.com/news/business/personal-finance/how-to-invest-in-gold-when-prices-ride-high-9890881.html

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