The precious metal, gold, traditionally plays a pivotal role in India’s culture. During festivals and on auspicious occasions, including weddings, it is customary to buy gold. It is symbolic of Goddess Lakshmi and believed to bring good fortune and wealth. Besides, gold commands a store of value and is an asset class that can be passed on to generations.

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This year in 2022, gold has clocked +2.7 percent absolute returns (as of September 19, 2022) in rupee terms. Gold prices have remained rangebound hovering around Rs 50,000 per 10 grams levels.

If you are considering investing in gold this festive season, here are factors that may bode well:

1) Rising Geopolitical Tensions --

In many parts of the world, geopolitical tensions are escalating. It’s been around seven months since Russia invaded Ukraine, and there are now fresh tensions between China and Taiwan. Likewise, India is facing border disputes with China at the Line of Actual Control. Similarly, North Korea is provocative with nuclear activity build-up and missile launches. In the gulf, too, there are regional conflicts.

In such times of uncertainty, which may have repercussions on society, policy and the global economy, the spotlights would turn on gold. The RBI, as well as other central banks, being cognizant of the risks involved have been buying gold.

2) Spiralling Inflation -- The spill-over from geopolitical shocks in the form of supply chain disruptions and higher oil and commodity prices, the appreciation in the U.S. Dollar (causing imported inflation), erratic domestic monsoons, pose a risk to the inflation trajectory. The cost of living or inflation in 2022 is likely to remain elevated.

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Graph 1: How has gold reacted to high inflation

(Source: World Gold Council)

Past performance may or may not be sustained in the future.

A World Gold Council study highlights that, usually, in periods of high inflation of over 6 percent, gold turns bold or exhibits its sheen, thus helping to combat the effects of high inflation.

3) Chances of a Global Recession -- With central banks across the world raising rates this year with a degree of synchronicity not seen over the past five decades, the World Bank foresees the world entering a recession in 2023 and a string of financial or debt crises in the emerging markets and developing economies. If this turns out to be the case, it may embolden gold.

Graph 2: How has gold fared during a U.S. recession

(Source: World Gold Council)

Past performance may or may not be sustained in the future.

A World Gold Council study reveals that gold has proven to be one of the best-performing assets, particularly during the U.S. recession and when it has coincided with high inflation.

4) Intensifying stock market volatility -- Going forward, the stock market is likely to display intense volatility due to aforesaid factors. In such times, gold would display its trait of being an effective portfolio diversifier.

Graph 3: Performance of gold v/s equity v/s bonds

*Data as of September 19, 2022

(Source: ACE MF,)

Past performance may or may not be sustained in the future.

Graph 3 above highlights how gold has usually been a good portfolio diversifier in periods when equities disappointed investors.

Since India’s independence in August 1947, gold has a compounded annualised return of 8.8 percent as of September 19, 2022. It makes sense to strategically allocate around 20 percent of the investible surplus to gold. This 20 percent of the entire portfolio in gold (with a long-term view) can help you diversify your portfolio through the ups and downs of financial markets.

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And when you invest in gold this festive season, consider the smarter investment avenues such as Gold ETFs and Gold Mutual Funds which can give you the comfort of purity, price efficiency and liquidity.

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The author, Chirag Mehta is CIO at Quantum AMC. The views expressed are personal