Is Investing in Yellow Metal Still the Gold Standard? Here’s What Experts Say


For most millennials, an investment in yellow metal, or gold does not seem like a promising investment. And with the US Fed planning to raise interest rates by around 50bps in September to pull down the already easing inflationary pressures, gold prices have already touched their monthly lows, increasingly losing their sheen.

Even today, gold futures prices crashed 0.2% to Rs 51,322 per 10 grams. And they are expected to stray southwards for some time now. But is it a good idea to completely duck having gold in your portfolio?

Gold as an asset class

Investing significantly in physical gold is a cumbersome task. The high costs attached to its storage and the illiquidity of the metal make it impossible to retain gold in physical form. But that does not deter it from being the choice of investment for many Indian women.

Radhika, a Delhi-based homemaker, says, “Gold has a strong and unique social value that is unmatched by any other investment option. One can’t wear shares and other investments on your neck. Gold gives a sense of security to many women in India and that sense of security is very precious and qualitative. Not everything can be quantified”

As an investment, gold has only delivered a CAGR of 10%, growing 45x since 1979, the year BSE Sensex was established. During the intervening time, this benchmark index has given 390x returns.

However, gold has traditionally been a good hedge against inflation. The general observation is that prices of the gold rally in times of high inflation and rising economic uncertainties. That’s because as the cost of living goes higher, investors shift to low-risk, stable-return generating investment instruments. Gold is one of them. Naturally, they do not offer inflation-proof returns.

THE ETFS

Here’s where Gold ETFs come into the picture. Mirroring the price of physical gold, these exchange-traded funds invest in the bullion. One ETF unit is representative of 1 gram of gold. In short, they combine the simplicity of investing in stock markets and holding the metal.

But if you have only invested in gold or gold ETFs, your portfolio’s returns would paint a bleak picture. According to data from HDFC Gold ETF, the 10-year average return has been a paltry 4%. With inflation currently raging at 6.71%, your net returns would be negative.

In tune with current global trends, gold ETFs have been seeing massive selloffs. As per AMFI, Gold ETFs amassed only Rs 0.96 crore in July 2022. Correspondingly, they saw outflows worth Rs 456.75 crore. The average asset under management (AUM) for these ETFs has also declined from Rs 20,142 crore to Rs 19,987.66 crore.

Despite this, Viral Bhatt, who runs Money Mantra, a Mumbai-based personal finance advisory, advises allocation of about 5-10% of your portfolio to gold ETFs.

Rohit Shah, a SEBI-registered investment advisor, agrees. “If one is looking to invest in gold looking at good returns in the past two-three years, he/she may be disappointed. The benefit of gold as an asset class is the non-correlated returns on the balance sheet. When things are really crashing, the gold part of your portfolio can shine. If you like to make a multi-asset class portfolio with optimised returns, gold is for you. But if your priority is to maximise returns, then you may not like gold in the long run,” he signs off.

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