A recent study on precious metals by Windmill Capital, a wholly-owned subsidiary of smallcase Technologies Pvt Ltd, highlights that Gold has been in focus during FY23 due to the uncertainty in the global financial markets. The equity markets are expected to remain volatile due to inflation and slowdown concerns, so gold will continue to remain in focus as investors look to move towards safety. Usually, gold acts as a hedge against inflation and protects capital when the equity markets are in a downtrend. According to MCX, gold prices have moved up over 20% to Rs 60,800 as on April 13, 2023, from Rs 50,800 as on May 3, 2022 (Akshaya Tritiya, 2022). Gold is expected to witness strong demand due to recession fears and the meltdown of economic activity in the US.
Gold ETFs are preferred over purchasing gold in physical forms like jewelry, coins, and bars. It can be either dematerialised or traded in paper form just like regular funds on the stock exchange. They are purchased and sold at the same rate across India, giving them an edge over physical jewelry. There is complete transparency in prices, and these funds can be traded at any time through a broker from any location. The investor doesn’t have to worry about storage, pay locker fees, and worry about safety issues as they hold these funds through Demat. Quite similar are the reasons to invest in Sovereign Gold Bonds which offer an additional layer of tax friendliness.
Naveen KR, Senior Director – Investment Products, Windmill Capital, smallcase manager, said, “With growth prospects being poor and inflation expectation continuing to remain high, gold is likely to perform well in the near future. Amidst serious geopolitical upheaval, an average investor tends to stick to safer assets, which makes gold an interesting option for investors.”
On an average gold has returned 12% in INR. The base case expectation is to see similar returns, if not 200-300 bps more.
In the Indian context, gold has doubled over the past 10 years on an absolute basis, while it has managed to deliver compounded returns of 7.5%. In USD terms too, gold has been a star performer, even if one goes back to the 1970s. It has delivered returns close to 10% on average, for almost 50 years. The difference between gold returns in INR and USD is simply the currency exchange fluctuations.
Gold has always witnessed a robust demand scenario which makes it an all-weather asset class. From a demand-supply point of view, there hasn’t been any time period where there was abundance of gold. Therefore, its scarcity (to a certain extent) also aids in the price movement.
Gold is often regarded as an inflation hedge. Though there is no absolute certainty with respect to gold’s correlation with inflation, empirical studies present a mixed scenario. In this sense, since inflation is completely driven by macroeconomic developments, it would not be correct to say that gold has proved to be an effective hedge in every inflationary period, but definitely in some.
There are enough triggers that could propel the yellow metal higher. Going forward, gold’s trajectory will get largely affected by the way inflation trends and the way equity markets perform. If equities continue to remain sluggish, investors will continue to invest in gold, in order to achieve inflation-beating returns. However, if equity markets see a turnaround, gold could lose the exclusive spotlight that it currently enjoys.
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