As the fear of rising inflation spreads across major economies, Indian investors too should ensure that investments are done in the right asset class that can generate inflation-beating returns.
Given that gold is not very affected by currency rates – the effects of inflation on this tool are almost minimal. The price of gold is also directly proportional to the rate of inflation.
So, the price of yellow metal tends to rise when the cost of living increases. When fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and hence tends to rise along with everything else.
According to Renisha Chainani, Head of Research of Augmont Enterprises Pvt Limited, fears over inflation, and whether it will be transitory or not, continue to cast a dark cloud over all asset classes and are acting supportive for gold in the short term now.
“Because higher inflation leads to lower interest rates, currency depreciation, higher unemployment, etc. Gold is often hailed as a hedge against inflation—increasing in value as the purchasing power of the dollar declines. As long as inflation remains elevated, the US FED will remain accommodative in monetary stimulus and low-interest rates, which is very supportive for gold and helps in beating inflation,” Chainani says.
Anurag Jhanwar, Co-founder and Partner, Fintrust Advisors LLP further tells that the safe heaven tag of this intriguing yellow metal is time-tested. It has been able to maintain its shine, generating long-term positive returns across economic cycles, in periods of inflation as well as deflation.
Citing an example, Jhanwar said that gold has returned more than 10 percent CAGR since 1971. “It has outperformed all asset classes ranging from the US bond to the stocks, developed market equities to the major commodities,” Jhanwar states.
“In times of uncertainty, standstill growth, and rising inflation, exposure to this asset plays an important role in protecting wealth and thus should always be a part of one’s portfolio,” he advises.
Moreover, gold is seen as a good store of value so investors should purchase it when they believe that their local currency is losing value. Jhanwar suggests one to be prudent and keep 5-10 percent of portfolio invested in gold.
While traditionally gold was exchanged or bought in a physical form and it still is, there are certain problems attached to handling physical gold such as storage or chances of theft, purity concerns, etc.
Given the problems associated with physical gold, one could invest in gold ETFs, digital gold, or sovereign gold bonds instead, financial experts say.
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