All that glitters is gold!

Geopolitical tensions have pushed up the demand for gold
All that glitters is gold!
Image for representational purpose only.Pixabay

Rush for investment in gold has once again come into focus and its prices are spiralling. Courtesy, the ongoing war between Russia and Ukraine. The war has already sent the markets in oscillating mode where uncertainty looms large following the fast surging prices of crude.

The Brent Crude touched $139.13 per barrel and the international crude oil price in Indian basket terms surpassed the $130 a barrel mark on March 7, as reported by the rating agency ICRA.

The agency further states that the price of the Indian crude oil basket has averaged $114.6 a barrel so far in the week of March 1-7. This is a 23 percent surge from $93.3 a barrel in February.

We saw another first on March 7 when Indian rupee (INR) breached Rs 76.94 to a dollar mark. An ET poll of 14 brokerages, banks and treasury departments showed that the currency market is bracing for wild swings in the next few weeks unless the Ukraine war is brought to a diplomatic conclusion. The rupee, as per the poll, could breach even the 80 mark to a dollar.

All this is because market volatility is mounting unprecedented inflationary pressures on the economy and is not only halting the recovery of economic growth from the pandemic onslaught, but will also further aggravate the slowdown in the economy.

Amid these fears, the war has triggered a rush for safe haven investments that pushed up the global gold price to $2,000 per ounce on Monday (March 7). Russia being a major producer of gold is driving the fears of supply shortages of the yellow metal and this is leading to the ongoing surge in gold prices. In the first week of this month, we have witnessed an increase of over $40 in gold prices.

The rush of investors towards gold in the times of war is not a new phenomenon. Historically speaking, investors and even common people have preferred investment in gold as a safe haven asset to insulate themselves against the economic consequences of a war, natural disasters or political unrest.

The ongoing Russia–Ukraine conflict is going to produce more economic pain in the coming times as the western countries are mulling for harsher sanctions on Russia. This is one of the major factors which supports more surge in the prices of gold as people would be flocking to this tested-safety asset.

Here, an analysis of the geopolitical situation reveals that all the war-driven developments will not only add fuel to the fire of already high inflation, but it would definitely take a toll on the already slowing economic growth, spike market volatility and hit the risk-taking capacity of investors. Overall, this scenario, among other things, will translate into the continued surge in the prices of gold.

Meanwhile, in the local (J&K) context, we have an army of risk-averse investors who may be in a dilemma as they find too much war-driven uncertainty hovering over the markets. It must be in their minds to hedge their investment portfolios in the volatile markets and look for diversification.

Since we are discussing the power of gold, it merits a mention how safe is the investment in gold during the ongoing geopolitical tension? This question must definitely be probing them.

When we look at investment in metals, we find that of all the precious metals gold is the most popular mode of investment. People have intrinsic love to store their wealth in gold as it’s considered the most dependable metal during uncertainties, and economic crises.

Time has proved that gold is more stable and liquid than any other asset class and has acted as a strong wall against any crises. Notably, investors have been using the power of gold since the times of the Great Depression in 1930 as a hedge to protect their investment portfolio in volatile market scenarios as well as to enhance returns and preserve their wealth.

Generally speaking, Kashmiris have always viewed gold as one of the most valuable commodities and own it mostly to hedge during the times of any crisis. Our elders tell us stories of how gold has proved a gainful wealth insurance instrument during the times of crisis, be it Indo-Pak wars, natural disasters, or political unrest.

Gold has been an integral part of our culture. Nothing has threatened our love for gold. Uniquely, mostly we own gold in the form of wearable wealth, like necklaces, bangles or earrings and very less as depreciation-safe bars or ingots. Such treasure is a symbol of generations of patience, thrift and, of course, risk-averse genes.

Our great-great grandparents, who bought gold instead of having a piece of land, knew that if they managed to hang on to the gold, it would stand their offsprings in good stead. Buying gold jewelry may not be called an investment in the rest of the world, but in our culture, it’s one of the most valuable investments. It has not only brought riches to the people but also rescued them during the times of crisis.

For a Kashmiri, gold jewelry is the best way to preserve and invest wealth. Kashmiris have always felt that whenever they need money, they can sell their gold to generate cash. This is the way our parents and grandparents have always done it.

Meanwhile, as far as professional investors are concerned, they should increase their exposure to gold if the economy and stock markets are highly volatile and lots of uncertainties are visible. For the sake of diversification and hedge against market uncertainties, experts have always favoured 2-5 per cent investment in gold in normal circumstances.

However, the ideal way to invest in gold is to invest in it regularly. And this way one can average out his price purchase to lay hands on higher returns when one decides to en-cash his gold holdings.

In the current geopolitical tension between Russia and Ukraine, experts don’t see any harm if investors diversify 15% of their investment portfolio into gold. A qualified market expert says:

“One should stick to the fundamentals and allocate 10-15% of their portfolio to this strategic asset class that has time and again played a return-enhancing and risk-reducing role in investor portfolios in times of financial, geopolitical or other crisis. Those already invested should thus stay put. New investors should avoid lumpsum investment at current levels.”

Exploring investment opportunities in gold is not cumbersome now. You can own gold in dematerialised form via Exchange-Traded Gold Funds or ETFs instead of owning it in physical form.

Over a period of time, the gold ETF has emerged as the most convenient and investor-friendly medium of investment. Its units represent physical gold that is 99.5% pure, with each unit representing 1 gram of gold. The units are traded on the stock exchanges like a stock of a company.

Gold ETFs absolve the investors from the worries of adulteration or impurities. Besides, an investor can track the value of his investment in real time and off load it as and when needed by him.

Selling and buying of the commodity in physical form involves a cost. The costs are involved in ETFs also, but here these are much lower than the expenses involved in buying – selling of gold in physical form.

(The views are of the author & not the institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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