The sharp cut in the gold import duty in the Budget from 15 per cent to 6 per cent, has had investors in Sovereign Gold Bonds (SGBs) and gold Exchange Traded Funds (ETFs) complaining about the sharp hit to their portfolio values. The cut has resulted in roughly a ₹5,000 per 10 gram drop in the price of standard gold, which was at ₹74,000 before the Budget. Gold ETFs and SGBs, which are benchmarked to this price, have lost 5-6 per cent.
But for investors who don’t own any gold or are looking to add more, this presents a good buying opportunity. Four factors bolster the case for buying gold at this juncture.
Good rewards
Globally, investors own gold for its safe haven status. But for Indian investors, gold has proved a rewarding investment in good times too. Analysis of gold price returns over the last three decades shows that for Indian investors, gold has delivered better returns than debt and only slightly lower returns than equity.
Rolling returns (and not point-to-point returns) are a good way to judge the return potential of an asset across market cycles. Running a rolling return analysis on month-end gold prices over the last 30 years (end-July 1994 to end-July 2024) shows that global gold prices, in US dollar terms, delivered an average rolling CAGR (compounded annual growth rate) of 7.2-9.1 per cent for investors who held it for one-five years at a time (See table).
The returns were even better for Indians. In rupee terms, over the three decades, gold delivered an average rolling CAGR of 10-12.8 per cent depending on the holding period. The higher returns come from the rupee’s steady depreciation against the dollar. This return is without accounting for the customs duty element in gold returns. They are proof that Indian investors cannot lose by having a portfolio allocation to gold to complement equities and supplement debt returns.
Shaky stock market
Traditionally, investors own gold for its ability to hold its head above water when other assets are sinking. Today, both global and Indian stock markets are heading into choppy territory after the relentless bull market since Covid. Globally, US slowdown fears (even if one discounts recession), worries about unsustainable US debt and the fate of the dollar, tensions in West Asia, a migrant crisis in Europe and trade wars with China at the epicentre — all point to a choppy year ahead for equities.
In India, with sluggish demand and returning margin pressures, the corporate earnings juggernaut seems to be heading for a pause. This creates downside risks for equities, which even at the index level are trading at not-so-cheap valuations of 23 times. There are also several pockets where PEs have soared to three-digits and are ripe for derating.
For investors seeking to shield their portfolios from a correction or a full-on bear market, gold has historically proved a good hedge. Gold has delivered gains in every year where Indian stock markets have taken a sharp tumble. In 2008 and 2011 when the Nifty50 lost 52 per cent and 25 per cent, respectively, gold ETFs gained 25 per cent and 30 per cent. This is because big equity meltdowns in India are inevitably triggered by global crises and pull-outs of foreign capital, which spark a rise in bullion and a slide in the rupee.
Rate cuts
After much toing and froing, it now seems likely that the US Fed will flag off its rate cuts in the latter part of this year. This can be positive for global gold prices because US treasures directly compete with bullion, as the asset of choice for global institutions seeking a safe harbour from uncertainty. Gold had a tough time breaking past its earlier highs as long as US treasuries were flirting with a 5 per cent yield and the US economy was throwing up blowout jobs numbers.
In the last couple of months though, US jobs data have taken a more sobering turn with unemployment rising to 4.3 per cent in July. The Fed has thus begun making dovish noises. Anticipating rate reversals from September, the US two-year treasury yield has tumbled from 5 per cent in April 2024 to 4 per cent now. A lower return from treasuries gives gold room to build on its recent gains. That global central banks have been stealthily adding gold to diversify from the US dollar, adds to the investment argument.
Duty hike
Indians who buy into gold at current prices can also hope to benefit from any reversal in the government’s policy stance. The history of domestic policy actions on gold shows that Indian governments have seldom managed to keep import duties on gold in the single digits for long.
Low gold prices inevitably lead to a surge in demand for jewellery, which spikes up the import bill and widens the current account deficit. Global crises cause foreign investors to pull out, triggering a precarious balance of payments situation and setting off a slide in the rupee. In such situations, Indian governments have usually turned to gold import duty hikes as an easy fix. Such hikes usually coincide with crises, reinforcing gold’s role as a portfolio hedge.
Investors looking to add gold at this juncture should prefer SGBs and gold ETFs over physical gold, as they offer better liquidity and mirror gold returns better. As gold is a volatile asset that also delivers losses to investors (23 per cent of the times on a five-year holding), allocations needs to be limited to about 10 per cent.