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Is Investing in Gold a Good Idea during Geopolitical Tensions?

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Gold prices have been on a rollercoaster ride for a few years, and the latest geopolitical tensions have added more turmoil to it. Investors across the globe are fearing that these factors could spiral up and hit the markets already hurt by COVID and inflation.

Many market professionals have cited geopolitical instability among the biggest risks for the global market in 2022. Under the current circumstances, the outlook is bullish for gold, as the precious metal is historically seen as a hedge against inflation and major economic and geopolitical disruptions. Gold prices soared to a 16-month high of $1,970 an ounce after Russia attacked targets across Ukraine. Multi Commodity Exchange (MCX) Gold April’s future has advanced by more than 7% so far in 2022, owing to the rise in investment demand and concerns for growth.

What Drives the Price of Gold?

Historically, there have been a few key factors driving the price of gold (you can also check our previous post for more detailed information).

  • Gold prices have been inversely related to the US Dollar Index. Therefore, a strong dollar index results in weak gold prices. 
  • Secondly, gold becomes valuable when there is geopolitical uncertainty as investors prefer the safety of gold, as we all saw during the 1970s and later after the Lehman crisis in 2008. 
  • Thirdly, when currencies get debased due to too much money getting printed, gold emerges as an alternative currency.  

As we see in the current geopolitical situation, Russia has decided to save the ruble by linking its value to gold. Russia is seeking to counter the collapse of the Russian currency by backing 5000 rubles with 1gm gold. With this initiative, a large part of the global energy trade could move away from the dollar. Also, linking the currency to gold is an economically responsible act, as currency backed by gold is considered stabler and stronger. It also discourages the wanton printing of currency, being practised by a lot of countries in the past.

How Do Indian Investors Go About Investing in Gold?

As we have already discussed in our previous posts, gold cannot be classified along with other asset classes like equity, debt, and real estate. Gold is, at best, a hedge against global uncertainty. Hence, exposure to gold must be restricted to around 8–12% of the total portfolio value, depending on the geopolitical situation. 

With so many other options in investing, it is important to understand how you invest in gold.

While buying gold bars and jewellery is the traditionally accepted form of buying gold, there are other forms of holding gold that are emerging. A few of them are discussed as below:

  • A long-term investor in gold can look at buying Exchange-Traded Funds on gold (Gold ETFs). These can be bought and sold like any stock in the market by paying basic transaction fees. They are liquid and track the price of gold very closely. It also saves you the hassles of storage, insurance, safekeeping, etc.
  • Gold traders can look to buy gold futures in the commodity markets by paying a nominal margin. However, one needs to be conscious of the risks involved as gold futures are a leveraged product, and just as profits can multiply, losses can also multiply.
  • The Reserve Bank of India (RBI) operates the Sovereign Gold Bond scheme, where you can participate in the gold price movement and also earn an annual interest of 2.50%. The Government of India guarantees these bonds, and are also traded on the exchanges.

In a nutshell, gold will continue to attract interest from buyers due to geopolitical uncertainty. The basic idea for investors is to purely look at gold exposure from the point of view of providing stability and in-built insurance for your portfolio. For live updates about gold prices and expert advice on gold investments, follow our social media handles and telegram channel. 

Disclaimer: Any advice or information in the post is general advice for education purposes only and is not responsible for generating any trading strategy for anyone. Please do not trade or invest based solely on this information.