Why Gold Should Retain Its Share In Your Portfolio
Over the years, gold has played its part of providing returns, as well as stability to the portfolio.
Investors have been looking at various options for their portfolio and while equity seems to be the most preferred route because of the strong performance, there is a need to ensure that adequate diversification is present.
An asset class that aids in this effort is commodities within which precious metals finds a place. Gold is one of the sub components of this and over the years this precious metal has played its part of providing returns, as well as stability to the portfolio. Even at the current juncture, this kind of exposure is required for the investor.
Here are some of the reasons for this.
Global Interest Rate Cuts
The year 2024 is likely to be the year when global central banks start cutting interest rates starting with the Federal Reserve in the U.S. The impact of a cut in interest rates in the U.S. is good news for precious metals like gold traded in dollars, because they are likely to witness a rise in the value due to this step. With the overall macro environment starting to become favourable for gold, it is vital that the investor should have at least some exposure to this metal so that they are not left out of the entire rally.
Local gold prices are impacted by international gold prices and the exchange rate movements. Even though international gold prices in dollar terms have not gone up significantly in the past 10 years, this could change in the current year.
The good part for the Indian investor is that now they have multiple options to make use of, for the purpose of buying gold. This ensures that they can match their time horizon with the option that they choose and this will make things convenient for them.
Sovereign gold bonds have been very popular with investors due to various factors and this is definitely one option that can be used. The bonds can be bought on the secondary market as well as through fresh issues when they come.
Currently, the last tranche of Sovereign Gold Bonds for the financial year 2023-24 is open from Feb. 12 to Feb. 16. Now these new issues usually come once every quarter, so one has to plan for these investments. At the same time, there are Gold Exchange Traded Funds, as well as Gold Savings schemes that can be bought and this will complete the requirement for the investor.
One of the key parts of the overall returns for gold for Indian investors is the extent of the rupee depreciation. This adds to the overall return that the investor will earn, as it pushes up the price of gold in the country. This is a big contributor to the overall returns that are earned by the investor, as the situation that has been witnessed over the years shows that even when international prices are steady the rupee depreciation adds to the local gold returns. With this depreciation trend expected to continue going ahead too, this will keep adding to the overall returns for the investors.
The issue of diversification of the portfolio is probably the most important point that should ensure that every investor has some amounts that are allocated to gold. There are chances that the other asset classes could run out of steam as some economic issues, or even geopolitical tensions impact the situation. It is during such times that the diversification of the portfolio holdings help in reducing the negative impact.
At the same time, if there is a crisis in the world then gold becomes the metal that becomes a safe haven and this also ensures an element of safety for the portfolio
Arnav Pandya is founder Moneyeduschool