Is this the right time to add gold to your portfolio?

Recently we saw a big correction happening in the market where benchmark indexes fell ~10 % amid geopolitical tensions(Russia-Ukraine) and inflation worries(US fed actions).

There was a sudden spike in the price of gold touching ~2000 per ounce, it kept the investors on edge whether they should join the glitter rush or not.

When factors contribute to sudden gold price hike??

1. Inflation

When the inflation is high, the demand for gold increases and vice versa. The price of gold will then shoot up as a result of high demand from customers.?Gold holds significant value and is used to hedge inflation. This is why investors prefer to hold gold rather than currency. As a result, when the inflation is high, the demand for gold increases and vice versa. The price of gold will then shoot up as a result of high demand from customers.

Refer to the below screenshot which refer to Inflation vs Gold returns

2. Sudden Outflow from equity market

Higher inflation leads movement of money from equity/stocks to bond/FD/gold kind of safe havens. People also try to move their money to bonds as it would give them some fixed rate of returns.

3. Global events

When COVID came to our lives in 2022 there was a sudden rush in prices of gold. Uncertainty about the future also leads people to move their money to safe havens like gold.

Recents geo-political situations like claims of world war 3 also lead to such events in the market.

Comparison below is for gold vs Nifty compared on AUG 2020 when COVID was on peak. They follow the inverse relation because of reason mentioned above

4. Government Gold Reserves

Central banks of most major countries hold both currency as well as gold reserves. The US Federal Reserve of the US and Reserve Bank of India are two prime examples of this. When central banks of large countries start holding gold reserves and procuring more gold, the price of gold goes up. This is because the flow of cash in the market is increased while the supply of gold goes down.

5. Festive Season

This is completely a demand supply situation where during peak wedding seasons we see too much gold buying creating an increase in price of gold. Though it doesn't contribute much overall, it is still in consideration.

So which one to choose?? Equity or gold

These two asset classes serve two different purposes. While equities bring in much needed growth – high returns (more than the rate of inflation) to the portfolio in the long term, gold acts as a hedge in times of uncertainty.

As a thumb rule you should have 10% of your portfolio in gold. By this i don't mean you should go and buy it right now.

The best time to buy gold is not today, it was 5-6 months ago.

The expectations from experts are that when The Russia Ukraine conflict gets resolved the prices may come down in the coming months.

Conclusion

It is good to have portfolio diversification with various asset class included.

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