Why gold is losing its status as a safe haven despite High inflation?

Why Gold is not safe heaven despite inflation

Gold has traditionally been seen as a strong hedge against inflation and a safe haven during times of uncertainty. This, however, has not been the case in the recent past; prices of the yellow metal have remained subdued, Amid high inflation, rising interest rates, and the ongoing war in Ukraine that has had strong ripple effects around the world.

Pure gold (24 carat) has fallen by around 3% to Rs 5,087 from Rs 5,246 per gram in Mumbai, the hub of the bullion trade, in the last two months. Gold 22 carat has fallen from Rs 4,805 to Rs 4,660 per gram during the same period. Gold had hit Rs 5,619 per gram on the Multi Commodity Exchange in September 2021.

Indian prices are dictated by international prices. Despite the high inflation and economic uncertainty around the world, gold has been largely trading range-bound, between $1,630 and $1,740 per oz over the past one month. It is currently around $1,690-1,700 per oz, and is expected to remain within a narrow range in the near future.

Why is Gold Depressed?

The rate hikes by the US Federal Reserve has led to the dollar strengthening against major currencies. A firm dollar amid rising interest rates makes buying gold more expensive, and reduces the investment appetite.

“The rise in US interest rates and the likelihood of the Fed’s hawkish stance continuing well into the next year may keep gold prices at the lower end of the range. The current spell of gold weakness may continue till there is more concrete information on the state of the major economies, especially given the central bank trade-offs between growth and promoting stability,” Said Joseph Thomas, head of research at Emkay Wealth Management.

Another reason for the subdued price trend is the rise in interest rates. People buy and sell gold, and move their money into fixed deposits and other avenues where returns are higher. The RBI has hiked repo rates by 190 basis points this year, and with inflation having hit 7.4% in September, more hikes are expected.

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Is gold still Safe Heaven?

There is still occasional talk about gold as a hedge against inflation and uncertainties. “But this property of gold has been undermined to a large extent; despite very high inflation in the US, Europe, and other territories, gold has not picked up. The precious metal is trading against the script,” Thomas said. The World Gold Council has said that “gold wasn’t the crisis hedge it has often been historically, certainly when measured in US dollars”.

Analysts expect gold prices to recover when the economy picks up and inflation comes under control. Many investors still keep a percentage of their wealth in gold. “A total of 65% of Indians invest a part of their income in one form or the other and gold emerged to be a popular choice of investment. With 53% preferring gold as an investment tool, 35% of the population showed awareness towards digital gold and 10% of people said that they had already invested in digital gold,” says a survey by Axis My India, a leading consumer data intelligence company.

Should you Invest in Gold?

Although gold has remained subdued in recent times, it is important to note that it has fallen relatively less than equities and some other risky asset classes. soma In that sense, it has preserved its value better, and has acted as a safe haven as far as capital protection is concerned. Experts say that as gold is a generational asset and will continue to rise in the long term (due to demand and limited supply).

Investors must follow the asset allocation principle and have 5-10 per cent of their portfolio allocation in gold. Investors should invest through sovereign gold bonds (SGBs), which offer an annual interest of 2.5% alongside the capital gains that come in line with the rise in the price of gold, experts say.

Sodhi Gautam

Sodhi Gautam

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