Gold prices down 22%; is it time to revisit your gold allocation?

Gold prices have fallen to almost 11-month low to Rs 44,600 per 10 gramme. From the highs of Rs 57,000 per 10 gramme in August last year, the yellow metal price has come down by 22 per cent or Rs 12,400 per 10 gramme. Gold prices have eased due to an improving global economic outlook. US and global bond yields have continued to rise. Better than expected jobs data led the benchmark US 10-year bond yield to soar as high as 1.62 per cent last week, the highest in 12 months.

"Higher yields reflect improving economic outlook but also increased inflation and interest rate hike expectations. Equities and commodities in last few months have benefitted from huge monetary inflow and prospect of inflation and higher borrowing costs have led to some nervousness. Gold yields no interest so it generally weakens when returns on bond increases," says Madhavi Mehta, Commodity Research Analyst, Kotak Securities.

Will gold prices fall further?

Industry experts believe the weakening of gold prices may be short-lived. A weakening dollar, growing inflationary pressure, debt accumulation and monetary expansion are all drivers for positive gold price.

"By committing to keep interest rates where they are now for the next couple of years, Powell has endorsed a decline in the dollar. Combine that with more spending with Biden's $1.9 trillion fiscal stimulus and expected infra splurge and you have ballooning deficits and further increase in debt which will keep the dollar under pressure," says Chirag Mehta, Sr. Fund Manager-Alternative Investments, Quantum Mutual Fund.

Mehta explains that with more money trickling down to the real economy due to additional spending, the market is expecting robust inflation going forward, which too will contribute to the dollar's downtrend. "International Gold may thus see some positivity in the coming weeks," he adds.

Use correction in gold price to build allocation

Gold prices in India have fallen relatively more due to a combination of falling international gold prices, appreciating rupee and reduction in customs duty. It gives a great buying opportunity to the investors who are looking to begin some allocation or increase their exposure to gold.

"The macro economic uncertainties like rising deficits and debt, lower rates for longer, threat of high inflation, lower real rates and bursting of asset bubbles, all seem plausible and therefore warrant an allocation to gold which remains an effective portfolio diversifier," says Chirag Mehta.

But, most experts advise to predefine exposure to the yellow metal. Do not go overboard.

"Since gold acts as a hedge against inflation, investors can consider around 10 per cent allocation to gold in their portfolio," says Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC.

Also read: Why gold prices are falling

Also read: Gold rebounds from 9-month low on weaker dollar, US stimulus