Gold as a Key Asset in Risk Management and Asset Allocation

In the latest Monetary Policy Committee (MPC) meeting held in October 2024, the members emphasized strong growth projections while indicating medium-term lower inflation expectations. These projections suggest that equity markets may remain stable, and the possibility of future rate cuts could further stimulate economic activity. However, despite the favorable outlook, significant geopolitical risks loom large on the global horizon. The ongoing Russia-Ukraine conflict, recent strikes by Iran, and China's escalating interest in Taiwan all pose potential threats to market stability. In such volatile times, investors must ask themselves a crucial question: where should they allocate their assets to hedge against these geopolitical risks? The answer lies in gold.

Gold has long been regarded as a safe-haven asset, especially during times of uncertainty. Its role in a diversified investment portfolio is more critical than ever, given the unpredictable nature of global tensions. Not only does it serve as a hedge against geopolitical risks, but it also acts as a store of value in inflationary environments. While inflation rates are projected to remain low, unpredictable events could always cause a spike in inflation, and gold can provide a buffer. Below are several ways investors can gain exposure to gold.

1. Gold Jewellery

One of the oldest and most traditional methods of holding gold is through jewellery. For many, it holds sentimental value and serves a dual purpose—both as an investment and as an ornament for special occasions. However, this method comes with its own set of challenges. Purity is a concern unless the jewellery is purchased from a reputed brand. Storage can also be an issue, particularly when the jewellery is not in use, and many opt for bank lockers that incur storage costs. Additionally, the high making charges associated with gold jewellery reduce its overall return as an investment.

2. Gold Coins/Bars

Gold coins and bars are a more straightforward way to invest in physical gold. Coins and bars generally have a higher purity mark compared to jewellery, making them a more reliable investment option. They are often used for long-term holding and as gifts during festivals or milestones. However, similar to jewellery, the issue of storage remains a concern, as investors will need to secure these items in bank lockers or safes.

3. Gold ETFs

Digital gold is a modern and highly convenient way to invest in gold. Available through trading platforms and mobile apps, this form of gold is especially popular among Gen Z and younger investors. Gold Exchange-Traded Funds (ETFs) is one way to invest in gold without the need for physical storage. Gold ETFs are traded on stock exchanges, much like shares, and allow investors to buy or sell units in a demat account. This form of investment provides liquidity and transparency, as prices closely follow the international prices of gold. Additionally, investors can trade Gold ETFs throughout the day, which allows for more control over the timing of entry and exit. One of the key benefits of ETFs is that investors don't need to worry about purity or storage concerns, as everything is managed by the fund.

4. Gold Mutual Funds

Gold mutual funds operate similarly to ETFs but without the need for a demat account. These funds invest in Gold ETFs or directly in the physical commodity. Investors can purchase units at the Net Asset Value (NAV), and as the price of gold rises, the NAV of these funds also increases. Gold mutual funds offer a cost-effective way to invest, as they typically come with lower expense ratios. Investors can invest via systematic investment plans (SIPs), allowing them to invest small amounts regularly, which is ideal for those who are looking to accumulate gold over time for future financial needs. Additionally, gold mutual funds eliminate the concerns of purity, storage, and liquidity, making them a convenient and flexible option.

Sovereign Gold Bonds (SGBs), once a popular option that offered a 2.5% annual interest, have been discontinued. These bonds were a highly attractive form of gold investment due to the interest payout, but investors will now have to turn to the alternatives mentioned above.

Conclusion

In the current geopolitical climate, allocating a portion of one's portfolio to gold can provide much-needed stability and risk management. Whether through traditional methods like gold jewellery and coins, or modern digital platforms and ETFs, there are several ways to gain exposure to this valuable asset. Gold continues to be an essential part of a well-diversified portfolio, offering protection against both market volatility and geopolitical risk. Investors should carefully assess their individual financial goals and risk tolerance before deciding on the best way to incorporate gold into their investment strategy.

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