It’s role is that of a portfolio diversifier, not a wealth creator.
The essence of portfolio diversification is the diverse behaviour of various investment assets. The staple investment categories are equity and bonds. Gold per se is not a staple investment asset but is a useful portfolio diversifier. When the equity market goes downbeat, gold tends to get supported by the same set of factors that is disturbing the equity market.
Usually, gold prices get bolstered when there is global uncertainty. Equity market is currently positive. But this also is positive for gold.
Inverse correlation of gold with USD
The thumb rule to predict the movement of gold prices, globally, is that it moves inversely to the strength of the US dollar (USD). For the past couple of years, the USD has been on the stronger side. The US Federal Reserve has been hiking interest rates to combat high inflation. Currently, they are at the last leg of the rate hike cycle. Either the hike cycle is over or there may be at most one more rate increase by 0.25%. In this scenario, the USD would either remain range-bound or may weaken, as and when the US Federal Reserve cuts interest rates sometime in 2024.
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It is not just the inverse correlation of gold with USD strength that is supportive at this point of time. There is a fundamental shift happening in the geo-political order. There is a gradual but definitive move happening towards de-dollarisation. Global trade is denominated in USD. The USD will remain the reserve currency of the world in the foreseeable future. But the shift that is happening, cannot be denied.
Countries are starting unilateral trade in their own currency, in defiance of the US. Trade between Russia and India in rupees, or between Russia and Saudi Arabia in ruble, is an example. In the backdrop of this shift, central banks are stocking up relatively more in gold for their surplus reserves. They are parking a little less in USD and little more in gold. This obviously is positive for gold.
Allocation to gold should be 10% or 15% of your portfolio, and not a major component. The purpose is not to predict a particular price level and sell off at that level, but have an allocation in the portfolio. This will give better volatility-adjusted returns over a long period of time. However, equity and bonds remain the staple assets. Equity provides growth of wealth over a period of time, and debt or bonds offer stability and liquidity.
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There are multiple modes of taking exposure to gold. Financial form i.e. non-physical form is better: no maintenance, and you can convert to physical form by redeeming your financial investment. Sovereign Gold Bonds are issued by the government, hence there is no default risk on the bonds. You get an interest of 2.5% over and above the price appreciation. Provided you hold till maturity, there is no tax as well. That apart, there are mutual fund schemes, exchange traded funds and digital gold.