Why Gold prices crashed? Is it a good time to Invest in Gold?

Investment in gold has been an old tradition, especially in India. Gold preserves its value in the long run, and thus has been a chosen option for long-term investors. With the gold prices crashing to a multi-month low, is it a good time to invest in gold?

Inflation rates have been at an all time high in the post-pandemic world, with CPI reaching 8% and WPI at 15%. In times of high inflation, gold generally generates an above-inflation return, so people gravitate towards gold, because in the long run this precious metal will definitely yield positive returns as its supply is limited.

Another major factor contributing to the current situation, is the under-performance of the equities market over the last nine months. Equity markets tend to have a negative correlation with inflation, whereas this yellow-metal has a positive correlation, and investors are sure to not incur any loss in the long run.

Furthermore, due to the rising instability in the geopolitical arena on account of the Russia-Ukraine war, supply of crude oil and several agri-commodities is also disrupted, further driving the inflation high, and makes gold more attractive for investors.

As a result, gold import has increased over the last couple months. This poses a challenge to our economy, as the increased imports lead to current account deficit. Moreover, with the Dollar becoming stronger, the import becomes even costlier for the Government. In order to discourage imports, the government has raised the duty on gold from 7.5% to 12.5%.

Even though the demand was supposed to increase, the gold prices are at three-month low, currently trading around $1720 per ounce. The main reason for this dip is mostly due to the increased interest rates by the US Federal Reserve. With inflation rates in the US, being around 9.1% in June, the Federal Reserve is likely to raise the interest rates by at least 75 basis points. This will raise the opportunity cost of holding gold for investors. For short-term investors, investment in bonds in the US will give better returns than gold. This will further increase the pressure on gold, dipping its prices even lower.

So, what should gold investors do?

Though the returns in gold do not seem promising in the near future, Gold should be used more as a hedge, to provide protection in an uncertain and volatile market. Financial experts suggest investing 5-10% of your portfolio in gold. However, it is advised to invest in paper forms of gold, and not in jewellery. Sovereign Gold Bonds, Gold Exchange traded funds or ETF and Gold savings fund can be some options, investors would like to explore. These are sold through offices and branches of nationalized banks, private banks, foreign banks and some designated post offices.