According to the Economic Times, gold gave double-digit returns in 2022 despite volatility. The yellow metal started the year at around Rs 48,000 per 10 grams and touched a high of Rs 55,000 in March on the back of a geopolitical crisis led by the Russia-Ukraine war. After a period of consolidation, gold saw some buying interest and climbed to Rs 54,000 levels by the end of the year. This translates to a gain of over 12% on a year-to-date basis.
The main factors that influenced gold prices in 2022 were:
The Russia-Ukraine war, which increased the demand for gold as a safe haven asset
The US Federal Reserve’s five consecutive interest rate hikes, which put pressure on gold prices but also boosted the buying sentiment among retail investors
The hike in import duty of 5% by the Indian government to control the current account deficit, which increased the value of gold in the domestic market
The depreciation of the Indian rupee against the US dollar, which made gold cheaper for overseas buyers.
Historical Gold Prices for 5 years (INR per gram) - https://www.rupeerates.in/Gold (26/06/2023 - 10:37 AM)
Role of Gold in a Portfolio
Gold is not only a precious metal but also an asset class that can enhance the performance and diversification of a portfolio. Here are three reasons why you should consider adding gold to your portfolio:
Gold provides protection against inflation: Gold tends to retain its purchasing power over time, unlike paper currencies that lose value due to inflation. Gold can act as a hedge against rising prices and preserve your wealth in real terms. In short, Gold is considered a long-term “Store of Value”
Gold reduces volatility and risk: Gold has a low or negative correlation with other asset classes, such as stocks and bonds. This means that gold can reduce the overall volatility and risk of your portfolio by providing stability and cushioning against market fluctuations.
Gold offers liquidity and flexibility: Gold is one of the most liquid and widely traded assets in the world. You can buy and sell gold easily through various channels, such as physical bullion, jewellery , coins, bars, exchange-traded funds (ETFs), sovereign gold bonds (SGBs), etc. You can also adjust your exposure to gold according to your risk appetite and investment goals.
Comparison of Portfolios with and without Gold
To illustrate the benefits of gold in a portfolio, let us compare two hypothetical portfolios over a 10-year period from FY 2013-14 to FY 2022-23. One portfolio consists of 60% stocks and 40% bonds (Portfolio A), while the other portfolio consists of 54% stocks, 36% bonds, and 10% gold (Portfolio B). We will assume that both portfolios are rebalanced annually and that stocks are represented by NIFTY 50 index, bonds are represented by CRISIL Long Term Corporate Bond index, and gold is represented by Nippon India ETF Gold BeES.
The following chart shows the cumulative returns of both portfolios for an initial investment of Rs 10,000:
As we can see, the cumulative value of Portfolio A over the long term was Rs 30,328, which was slightly higher than Portfolio B’s Rs 29,452. The CAGR of Portfolio A was 11.73%, while that of Portfolio B was 11.41%.
Nevertheless, Portfolio B had a lower volatility of 13.18%, in comparison to Portfolio A’s 15.54%. This suggests that Portfolio B had a better risk-adjusted return than Portfolio A, as demonstrated by the Sharpe ratio of 0.39 as opposed to 0.35.
Therefore, adding Gold to your Portfolio would improve the risk-adjusted return of your portfolio.
Ways to Invest in Gold in India
There are various ways to invest in gold in India, depending on your preference, convenience, and objective. Some of the common ways are:
Physical gold: You can buy physical gold in the form of jewellery, coins, bars, etc. from jewellers, banks, post offices, etc. However, physical gold has some drawbacks, such as making charges, purity issues, storage costs, security risks, etc.
Gold ETFs: You can buy gold ETFs from the stock exchange through a Demat account and a trading account. Gold ETFs are units that represent physical gold and track the gold price. They offer transparency, liquidity, low cost, and tax efficiency.
SGBs: You can buy a Sovereign Gold Bond (SGB) from designated banks, post offices, stock exchanges, etc. SGBs are government securities that pay interest and are linked to the gold price. They offer safety, convenience, capital appreciation, and tax benefits.
Gold mutual funds: You can buy gold mutual funds from asset management companies or online platforms. Gold mutual funds are schemes that invest in gold ETFs or gold mining companies. They offer professional management, diversification, and ease of investment.
Digital gold: You can buy digital gold from online platforms or mobile apps that partner with reputed bullion dealers. Digital gold is a convenient and secure way to buy and sell gold online. You can also get physical delivery of gold or sell it back to the platform.
