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Gold prices have fallen, should you invest? What should be your strategy?

Gold Rate Today: Gold prices, after touching their peak during the pandemic in 2020, had dropped nearly 20 per cent to Rs 46,000 per 10 grams by March 2021. As the second wave of the pandemic engulfed India, gold prices surged yet again and remained volatile with an upside bias as geopolitical tensions gripped the world. Currently, gold prices are trading about 10 per cent below their historical high of over Rs 57,000 per 10 grams.

Movements in gold prices over the last two years are a strong indicator of gold being the preferred investment during uncertain times, a pattern that has fuelled price spikes. In recent months, a surge in equity markets and inflation-tightening measures by the central bank have made gold prices quite volatile. However, they are not far from the peak.

So, amid the current scenario when gold prices are trading lower than the historical highs, should you invest in it? If yes, what should your strategy be?

When it comes to growing money as well as conserving it, gold has been a trusted asset for ages. When it comes to risk-adjusted returns, the presence of gold in your portfolio may help balance your returns in tough times.

Should you currently invest in gold?

When prices are lower than the historical highs, the case for investing in gold gains ground. Currently, global concerns about stagflation are on the rise as several countries continue to struggle to resume economic activities on a pre-pandemic level. Considering this, gold as an investment asset is likely to remain in demand.

Thus, a short to mid-term investment in gold may look promising. However, having said that, gold prices are not insulated from volatility and corrections. Therefore, rather than timing your investment in gold, it is advisable to keep investing in gold in smaller amounts from the long-term perspective. During phases when gold prices correct by 5-10 per cent or more, the corrections may be used to invest more.

What should your strategy be for investing in gold?

Gold is a safe investment option that can help provide stability to your overall investment portfolio. However, it must be treated more like a hedging option than an investment alone. Here are a few investment strategies to consider when investing in gold:

1. Asset allocation

Asset allocation is key when it comes to investing in gold. Ideally, investment in gold should be up to 10 per cent of your entire portfolio wherein you may start with a 5 per cent allocation and gradually increase it to 10 per cent. If you are highly risk-averse and conservative, aim to keep your exposure to a maximum of 15 per cent. Aggressive investors may consider taking the allocation to 15 per cent only during corrections in gold prices. Going beyond is never advisable as it can hamper the wealth creation journey and you may end up missing out on the better opportunities you could otherwise get by investing in other wealth-creating instruments.

2. Avoid buying physical gold

Unless there is a need for jewellery or ornaments, avoid buying physical gold – coins or bars for investment purposes. Not only does physical gold put you at risk of theft but it is also cumbersome to store. Liquidity too could pose an issue. For instance, I buy physical gold only for the purpose of gifting, never as an investment. If you must invest in physical gold, ensure that you keep the original bills and receipts of your purchase as proof of your ownership.

3. Opt for digital gold instruments

With several innovative gold-related investments now available online, investors may consider investing in gold digitally. Gold ETFs, Gold Funds and Sovereign Gold Bonds (SGB) are three such investments that, while essentially documents, are valued in sync with the value of gold. These investments provide the benefits of investing in physical gold but without the associated risks.

Diversification is key to a successful financial portfolio. If you wish to add gold to your portfolio, do so with digital gold investments while restricting your exposure to 5-10 per cent.

The author is the CEO of BankBazaar.com. The views expressed are that of the author.




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