In an era of ever-shifting global financial landscapes, investors are increasingly searching for refuge from market turbulence and economic ambiguity. This quest for stability has revitalised interest in a traditional asset: gold. Historically, gold has been a sought-after sanctuary during economic upheaval, and its appeal is growing. While owning physical gold has been the traditional means of hedging against uncertainty, Gold Exchange-Traded Funds (ETFs) are emerging as a more practical, accessible, and flexible approach for investors to protect their wealth.
The Allure of Gold in Uncertain Times
Gold has held a special place in the world of finance for centuries. Its intrinsic value as a tangible asset provides protection against various forms of market instability. During turbulent periods, gold's price tends to rise, making it an invaluable instrument for wealth preservation. Gold has a low correlation with other assets, particularly equities, making it an ideal choice to balance a portfolio in times of stock market volatility.
The knowledge that gold cannot be printed into existence like currency provides investors with the assurance of a limited supply, making it resilient against inflationary pressures. Gold's value has stood the test of time, serving as a reliable store of wealth for centuries, immune to inflation and economic downturns.
The presence of gold adds an additional layer of diversification within an investment portfolio, thereby reducing the overall risk of the portfolio. When political tensions rise or conflicts occur, gold often benefits as investors turn to it as a safe haven.
Gold prices and dollar correlation - 10-year chart
Gold price is inversely related to the U.S. dollar. As the dollar weakens, gold price tends to rise, providing protection against currency devaluation. For these compelling characteristics, the demand for gold in recent years, especially from global central banks, has been on the rise.
Another factor which is likely to provide support to gold prices in the near to medium term is the voracious buying of the yellow metal by global central banks. Leading the buying frenzy is China which alone accounts for 14% of the 800 tonnes purchased by global central banks, thus far this year. This surge in demand is a result of central banks trying to diversify their reserves away from the US Dollar.
Gold ETFs: A Modern Approach to Gold Investment
Gold ETFs are an innovative investment vehicle that offers exposure to the yellow metal without the need to hold physical gold. They have gained immense popularity due to their flexibility, ease of trading, and cost-effectiveness.
· Liquidity and Accessibility: Gold ETFs are traded on stock exchanges, making them highly liquid. Investors can buy and sell units of ETF just like stocks, offering easy access to the gold market.
· Transparency: One of the key advantages of gold ETFs is their pricing transparency. Investors can easily monitor the price of gold and consequently the performance of gold holdings.
· No Storage Hassles: Owning physical gold comes with storage and security concerns. Gold ETFs eliminate these worries as investors do not need to store the metal physically. Instead, units of gold ETF are held in a demat account, eliminating the fear of theft.
· Affordability: One unit of ICICI Prudential Gold ETF costs approximately Rs. 54. Given the lower cost of acquisition, gold becomes accessible to a broader range of investors, even those with a limited budget.
· Lower Other Costs: Buying physical gold can incur significant costs, including making charges, storage charges, dealer premiums etc. As compared to these, gold ETFs have much lower expense ratios.
In conclusion, gold ETFs offer an attractive and accessible means of safeguarding one's wealth in the face of economic uncertainty. As the global economic landscape continues to evolve, gold is likely to shine as a reliable store of value and a prudent investment choice.
Also Read | Income tax on gold: SGB vs gold ETF vs physical gold. Know taxation rules here
The author, Chintan Haria, is Principal - Investment Strategy, ICICI Prudential AMC.
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Published: 11 Dec 2023, 07:36 PM IST
