Why Gold Prices Have Soared by 20% in the Past Year and What Investors Should Do Now?

 

                                                            

Gold prices have surged by 20% over the past year, reaching a record high of Rs 73,958 per 10 grams in India this month. This rise comes after a 13% increase in 2024, following a 10% gain in 2023. The driving forces behind this surge include the rising US Treasury yields, the resilience of the US dollar, and a weakening Indian rupee. Additionally, demand for gold in India has risen, with a notable 19% increase in investment demand during the January-March quarter, according to the World Gold Council.

However, while gold has shown impressive short-term returns, its long-term performance is less remarkable. Over the past decade, gold has returned around 8% annually, a figure that pales in comparison to equities, which have provided over 12% returns during the same period.

Key Factors Behind Gold's Surge

1. Rupee Depreciation:
   Gold is traded globally in US dollars, but in India, it's bought using Indian rupees. As the rupee weakens against the dollar, even if the price of gold remains unchanged in USD, it becomes more expensive in INR. For instance, if the exchange rate shifts from 70 INR/USD to 75 INR/USD, the same ounce of gold will cost more in rupee terms.

2. Anticipation of Interest Rate Cuts:
   Gold tends to become more attractive when interest rates are expected to decline, as it offers a non-interest-bearing alternative. The anticipation of US Federal Reserve rate cuts has spurred demand for gold as an investment, pushing prices higher.

3. Gold as a Safe Haven:
   Gold has long been regarded as a reliable store of value, especially during times of economic or geopolitical uncertainty. With global tensions such as the Russia-Ukraine war and Middle Eastern conflicts, gold has become a go-to asset for investors seeking stability.

What Should Investors Do?

While gold has delivered strong short-term gains, it remains an unproductive asset class, offering limited returns in the long run compared to equities. Historically, gold yields 7-8% annually, which is lower than the 14% returns provided by equity markets such as the S&P BSE 500 over the last decade. Nevertheless, gold can still play a role in portfolio diversification.

If you’re considering adding gold to your investment mix, experts recommend purchasing Sovereign Gold Bonds (SGBs). SGBs provide the same price appreciation as physical gold but offer an additional 2.5% annual interest and tax-free capital gains if held to maturity.

For those with a substantial investment portfolio, allocating around 10% to gold and silver funds can enhance diversification and provide stability during market volatility. However, investors should not expect consistent high returns from gold and silver; instead, they serve as a stabilizing force during times of market fluctuation.