- Date : 13/02/2023
- Read: 7 mins
After giving good returns in 2022, gold prices hit an all-time high in February 2023. Will the outperformance continue? Let us evaluate.
In 2022, equities had a rocky year. While many global equity markets saw big cuts, Indian equity markets managed to end the year positively, although with low returns. Fixed-income products started the year with low interest rates. As the year progressed, these products saw an increase in interest rates on the back of central banks increasing interest rates to combat inflation.
There’s no doubt that gold had a good run in 2022. When compared to Nifty 50 and Indian government bonds, gold was the best investment option in 2022, with returns of around 15%. As of 4 February 2023, gold prices have already breached an all-time high for 2023. Many analysts expect gold prices to climb further in future.
So, should you increase gold allocation in portfolio? The answer is a resounding yes. In this article, we will look at the reasons why you should invest in gold or increase your existing allocation to gold.
Why should you invest in gold in 2023?
Gold started 2022 at Rs 47,473 per tola and ended the year with Rs 54,779 per tola. It gave 15.34% returns, which was better than Nifty 50 and Indian government bonds. As per the gold price information available on in.investing.com, gold prices hit an all-time high of Rs 58,895 per tola on 2 February 2023.
Analysts are bullish on gold and expect prices to increase further. Let us look at some of the reasons why you should invest in gold in 2023.
Also Read: Should You Buy Digital Gold?
1) Increase in demand supported by central banks buying
In 2022, the global annual demand for gold increased to 4741 tonnes, an increase of 18% over the previous year. The gold demand in 2022 was at an 11-year high. The high demand was supported by big buying from central banks across the world. Central banks bought 1136 tonnes of gold in 2022, a 55-year high. The factors for this increase in demand are high inflation, war, Covid, geopolitical uncertainty, etc.
Central bank gold purchases
The above chart shows how central banks across the world have been buying gold for the last few years. The central banks’ gold purchases in 2022 were the second-highest on record. The Central Bank of Turkey was the biggest gold buyer in 2022, adding 148 tonnes to its kitty. The Reserve Bank of India (RBI) added 33 tonnes of gold in 2022, taking its total gold reserves to 787 tonnes.
In 2023, if central banks continue to purchase gold in large quantities, it will push up gold prices further. So, the gold price rally may continue on the back of purchases from central banks and other investors.
2) Expected returns
The primary reason for most investors to invest in gold or any other asset class is the expectation of good returns. Gold as an investment did well in 2022 with returns of 15% (in Indian rupee terms). As highlighted in the earlier point, the gold price rally may continue in 2023 on the back of high sustained demand. Hence, investors may expect good returns from gold in 2023. It makes sense to add gold to your investment portfolio. If you already have gold in your investment portfolio, you may consider increasing the percentage allocation.
3) Weakening of the US dollar
In 2023, the US Federal Reserve is expected to pause the interest rate hikes. Also, there is a fear that the US economy will enter a recession in 2023. Both these factors are expected to weaken the US dollar. The US dollar and gold prices have an inverse relationship. A weak US dollar can lead to higher gold prices.
US dollar index over the past 6 months
Source: https://www.cnbc.com/quotes/.DXY
The above chart shows how the US dollar index peaked at around a level of 115 in September 2022. Since then, it has been trending down. During the same time, gold prices have done well. The fall in the US dollar index is one of the reasons why gold has been doing well recently. The trend of the US dollar weakening and gold prices going up is expected to continue in 2023.
4) Hedge against inflation and safe haven during uncertainty
Gold acts as a hedge against inflation. During 2022, major global economies such as the US and the European Union (EU) witnessed the highest inflation levels seen in decades. Central banks started hiking interest rates to combat high inflation. Although inflation has started to go down, it still remains considerably higher than the tolerance levels of many central banks. In 2023, it remains to be seen whether central banks will be able to reduce inflation below tolerance levels. Till that happens, gold prices are expected to trend higher.
Gold is also considered a safe haven during times of uncertainty. The global economy is still reeling with uncertainty due to the Russia-Ukraine war, COVID lockdowns in China, trade wars, etc. During such uncertain times, gold is a safe haven. So, gold is expected to do well in 2023 till we see a satisfactory solution to these issues.
Also Read: Should You Resort To Gold During Inflation?
5) Asset allocation - portfolio diversification
When investing towards your investment goals, you should always follow appropriate asset allocation. You should diversify your investment portfolio among domestic equities, international equities, fixed income, gold, etc. The percentage allocation to each of these asset classes will depend on your risk profile. Generally, if you have a high risk profile, your exposure to equities will be high and to fixed income and gold will be low.
On the other hand, an individual with a conservative risk profile will have high exposure to fixed income and low exposure to equities and gold. For most investors, the exposure to gold in their portfolio will vary from 10% to 20%. So, as part of your asset allocation, you should have some exposure to gold.
How can you invest in gold?
In the earlier section, we discussed why you should invest in gold in 2023. Now let us discuss how you can invest in gold. Some of the various ways of investing in gold include:
- Gold jewellery
- Gold bullion (coins and biscuits)
- Gold Exchange Traded Funds (ETFs)
- Gold mutual funds
- Sovereign Gold Bonds (SGBs)
- Digital gold
Gold jewellery and bullion are considered traditional assets. People buy jewellery for gifting and to wear during festivals and family functions. Gold coins are bought for investment purposes or gifting. For investing in gold in electronic format, you may consider gold ETFs. You can also invest in gold via a systematic investment plan (SIP). Gold mutual funds give you the option to invest in gold through the SIP route.
Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Among the various ways of investing in gold that we have discussed, SGBs are the safest investment mode as these are backed by the government. Apart from the capital appreciation potential, SGBs also offer you a 2.5% interest p.a. Also, when you redeem your SGBs with the RBI, you are exempt from paying long-term capital gains tax.
Also Read: Sovereign Gold Bonds: An Attractive Tax-Free Wealth Creation Investment Option
Actionable insights
Gold did well in 2022 and may continue to do well in 2023. Potential reasons for this include higher demand, US dollar weakness, high inflation, global uncertainty, etc.
As per asset allocation, you should think of allocating some portion of your investment portfolio to gold.
Various ways of investing in gold include jewellery, bullion, gold ETFs, gold mutual funds, SGBs, digital gold, etc.
(Source: in.investing.com for gold prices mentioned in tola)
In 2022, equities had a rocky year. While many global equity markets saw big cuts, Indian equity markets managed to end the year positively, although with low returns. Fixed-income products started the year with low interest rates. As the year progressed, these products saw an increase in interest rates on the back of central banks increasing interest rates to combat inflation.
There’s no doubt that gold had a good run in 2022. When compared to Nifty 50 and Indian government bonds, gold was the best investment option in 2022, with returns of around 15%. As of 4 February 2023, gold prices have already breached an all-time high for 2023. Many analysts expect gold prices to climb further in future.
So, should you increase gold allocation in portfolio? The answer is a resounding yes. In this article, we will look at the reasons why you should invest in gold or increase your existing allocation to gold.
Why should you invest in gold in 2023?
Gold started 2022 at Rs 47,473 per tola and ended the year with Rs 54,779 per tola. It gave 15.34% returns, which was better than Nifty 50 and Indian government bonds. As per the gold price information available on in.investing.com, gold prices hit an all-time high of Rs 58,895 per tola on 2 February 2023.
Analysts are bullish on gold and expect prices to increase further. Let us look at some of the reasons why you should invest in gold in 2023.
Also Read: Should You Buy Digital Gold?
1) Increase in demand supported by central banks buying
In 2022, the global annual demand for gold increased to 4741 tonnes, an increase of 18% over the previous year. The gold demand in 2022 was at an 11-year high. The high demand was supported by big buying from central banks across the world. Central banks bought 1136 tonnes of gold in 2022, a 55-year high. The factors for this increase in demand are high inflation, war, Covid, geopolitical uncertainty, etc.
Central bank gold purchases
The above chart shows how central banks across the world have been buying gold for the last few years. The central banks’ gold purchases in 2022 were the second-highest on record. The Central Bank of Turkey was the biggest gold buyer in 2022, adding 148 tonnes to its kitty. The Reserve Bank of India (RBI) added 33 tonnes of gold in 2022, taking its total gold reserves to 787 tonnes.
In 2023, if central banks continue to purchase gold in large quantities, it will push up gold prices further. So, the gold price rally may continue on the back of purchases from central banks and other investors.
2) Expected returns
The primary reason for most investors to invest in gold or any other asset class is the expectation of good returns. Gold as an investment did well in 2022 with returns of 15% (in Indian rupee terms). As highlighted in the earlier point, the gold price rally may continue in 2023 on the back of high sustained demand. Hence, investors may expect good returns from gold in 2023. It makes sense to add gold to your investment portfolio. If you already have gold in your investment portfolio, you may consider increasing the percentage allocation.
3) Weakening of the US dollar
In 2023, the US Federal Reserve is expected to pause the interest rate hikes. Also, there is a fear that the US economy will enter a recession in 2023. Both these factors are expected to weaken the US dollar. The US dollar and gold prices have an inverse relationship. A weak US dollar can lead to higher gold prices.
US dollar index over the past 6 months
Source: https://www.cnbc.com/quotes/.DXY
The above chart shows how the US dollar index peaked at around a level of 115 in September 2022. Since then, it has been trending down. During the same time, gold prices have done well. The fall in the US dollar index is one of the reasons why gold has been doing well recently. The trend of the US dollar weakening and gold prices going up is expected to continue in 2023.
4) Hedge against inflation and safe haven during uncertainty
Gold acts as a hedge against inflation. During 2022, major global economies such as the US and the European Union (EU) witnessed the highest inflation levels seen in decades. Central banks started hiking interest rates to combat high inflation. Although inflation has started to go down, it still remains considerably higher than the tolerance levels of many central banks. In 2023, it remains to be seen whether central banks will be able to reduce inflation below tolerance levels. Till that happens, gold prices are expected to trend higher.
Gold is also considered a safe haven during times of uncertainty. The global economy is still reeling with uncertainty due to the Russia-Ukraine war, COVID lockdowns in China, trade wars, etc. During such uncertain times, gold is a safe haven. So, gold is expected to do well in 2023 till we see a satisfactory solution to these issues.
Also Read: Should You Resort To Gold During Inflation?
5) Asset allocation - portfolio diversification
When investing towards your investment goals, you should always follow appropriate asset allocation. You should diversify your investment portfolio among domestic equities, international equities, fixed income, gold, etc. The percentage allocation to each of these asset classes will depend on your risk profile. Generally, if you have a high risk profile, your exposure to equities will be high and to fixed income and gold will be low.
On the other hand, an individual with a conservative risk profile will have high exposure to fixed income and low exposure to equities and gold. For most investors, the exposure to gold in their portfolio will vary from 10% to 20%. So, as part of your asset allocation, you should have some exposure to gold.
How can you invest in gold?
In the earlier section, we discussed why you should invest in gold in 2023. Now let us discuss how you can invest in gold. Some of the various ways of investing in gold include:
- Gold jewellery
- Gold bullion (coins and biscuits)
- Gold Exchange Traded Funds (ETFs)
- Gold mutual funds
- Sovereign Gold Bonds (SGBs)
- Digital gold
Gold jewellery and bullion are considered traditional assets. People buy jewellery for gifting and to wear during festivals and family functions. Gold coins are bought for investment purposes or gifting. For investing in gold in electronic format, you may consider gold ETFs. You can also invest in gold via a systematic investment plan (SIP). Gold mutual funds give you the option to invest in gold through the SIP route.
Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Among the various ways of investing in gold that we have discussed, SGBs are the safest investment mode as these are backed by the government. Apart from the capital appreciation potential, SGBs also offer you a 2.5% interest p.a. Also, when you redeem your SGBs with the RBI, you are exempt from paying long-term capital gains tax.
Also Read: Sovereign Gold Bonds: An Attractive Tax-Free Wealth Creation Investment Option
Actionable insights
Gold did well in 2022 and may continue to do well in 2023. Potential reasons for this include higher demand, US dollar weakness, high inflation, global uncertainty, etc.
As per asset allocation, you should think of allocating some portion of your investment portfolio to gold.
Various ways of investing in gold include jewellery, bullion, gold ETFs, gold mutual funds, SGBs, digital gold, etc.
(Source: in.investing.com for gold prices mentioned in tola)
