Gold Investment | Inflation: Should you invest in gold now?

Gold is traditionally the hedge against inflation. Prices of the yellow metal rally during times of high inflation. But that correlation has broken down in recent years. The domestic price of gold is defined by global prices and the rupee exchange rate, and not by the inflation prevailing in India. “For Indian investors, gold has now become more of a currency hedge than an inflation hedge,” says Deepak Jasani, Head of Research at HDFC Securities. His advice: Don’t make any tactical change in your gold exposure.

Though gold is no longer a hedge against inflation, it still is a cushion to fall back upon during uncertainty and turmoil. When the Ukraine crisis happened, gold prices spiked. They have declined a bit from the March highs but investors have still made about 11% in the past one year. “For now, international gold prices will continue to be pulled in different directions as investors struggle to determine which has bigger implications for the metal: sky-high inflation, potential recession, and other geopolitical and economic repercussions of the Russia-Ukraine war or higher yields and stronger dollar thanks to monetary tightening by the Fed,” says Ghazal Jain, Associate Fund Manager – Alternative Investments, Quantum AMC. “Put about 5-10% of your investment portfolio in gold. It can give you returns of 100-150 basis points above the inflation level,” says Harshad Chetanwala, Co-Founder of financial planning and wealth advisory fi rm

Though this might appear attractive, keep in mind that investing in gold also has opportunity costs. “When inflation is high and interest rates are hiked, the opportunity cost of holding gold also goes up,” says V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

This is why sovereign gold bonds score over other gold investments. The investor gets an additional 2.5% interest every year over and above the price appreciation of the metal. They also score over gold ETFs as there are no fund management charges. What’s more, there is no capital gains tax if held till maturity.

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