Golden Rule: Allocate 10-15% portfolio to gold

Gold prices hit ₹64,000 per 10 gm on Monday, the highest on record, spurred partly by the fact that demand is traditionally high during the wedding season. 38 lakh weddings are reportedly set to be solemnised in the coming three weeks. Gold prices are also rising worldwide. They touched $2,100 per ounce (1 ounce = 28.4 g) on Sunday evening in US markets before declining. Prices are expected to stay elevated, likely above $2,000 per ounce well into next year because the market expects that the Fed is unlikely to hike rates any more. Instead, it will start cutting rates in 2024, probably in the second half. This has driven US treasury yields and the dollar down.

European central banks, too, appear to be done with rate hikes. All this is good for equities, but also for commodities. Further, demand for gold, a haven asset, always rises in times of geopolitical uncertainty. Though this is not a factor in India, globally, there is uncertainty in spades on account of the ongoing conflicts in West Asia and Ukraine. India accounts for 30% of worldwide demand, and local and international markets are tightly linked.

The immediate impact of rising gold prices is likely to be a dampening of demand. An oft-cited general rule is that investors should allocate 10-15% of their portfolio to gold. Over a 3-year-period, return on gold is only 8%, compared to 17.29% for Nifty, though the gap is much lower if one considers five years. Investors in India should stick to the 10-15% range at least for a year. It seems very likely that Indian equity markets could see a bull run as a third term for the current gov seems assured. Structural factors such as sustained 6-7% GDP growth and rising per-capita income should strengthen the medium-term case for equities.