Gold continues to play an important role in a diversified investment portfolio, particularly during periods of economic uncertainty, inflation and geopolitical risks. A long-term allocation of around 10–15% to gold, depending on an investor's risk profile can help improve portfolio stability. Gold ETFs witnessed record outflows of Rs 725 crore in May, largely due to profit booking after gold prices touched all-time highs.
After a strong rally, many investors preferred to lock in gains, while some shifted money to other asset classes in search of better short-term returns.
Avoid Knee-Jerk Reaction To Price Correction
Investors who already hold Gold ETFs need not rush to exit their investments. Those looking to increase their allocation can consider investing gradually during price corrections instead of trying to time the market. Despite the recent correction in gold prices, investors should avoid reacting to short-term market movements.
Expectations of higher interest rates and a stronger U.S. dollar also weighed on investor sentiment towards gold during the month. However, a few months outflow should not be interpreted as a change in the long-term outlook for the asset.
ALSO READ: Gold ETFs Break 13-Month Win Streak As Investors Pull Out Rs 725 Crore In May
Avoid Chasing Past Returns
Gold's long-term performance remains impressive. Over the last five years, gold has gained around 134% in USD terms and nearly 210% in INR terms. Even over the past three years, prices have risen by about 117% in USD terms and 160% in INR terms.
The stronger returns in rupee terms are also a result of the depreciation of the Indian currency against the U.S. dollar. While these returns highlight gold's ability to preserve wealth over time, investors should avoid chasing past performance.
Global Factors To Guide Gold Prices
The government's decision to increase import tariffs on gold and silver from 6% to 15% is aimed at curbing imports and reducing pressure on India's foreign exchange reserves and current account deficit. While the higher duty may push up domestic prices marginally, the broader trend in gold prices will continue to be influenced by global factors such as interest rates, central bank purchases, inflation expectations and geopolitical developments.
About the Author: Satish Dondapati is Fund Manager – ETF at Kotak Mutual Fund.
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