Gold funds offered negative returns last year; should you be on them in 2022?

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After posing negative returns in most of 2021, gold funds had gained marginally in the last month of the previous year. Gold funds posted -7.6% returns in one year. However, they are already staging a comeback: they have given 3.21% returns in three months. The yellow metal is benefiting from the uncertainties over the omicron threat to the global economy.

To be sure, gold is indeed seen as a safe haven in times of volatility and uncertainty in the world. As the Omicron threat grows, gold prices are likely to move up in the coming months. However, at the moment gold prices are falling. The fall in gold is being attributed to the expected hawkish stance by the Federal Reserve and other global central banks.

Gold prices in India fell over half a percent on Thursday, on the back of weak global cues. Gold February futures were down 0.53% or Rs 256 to Rs 47,765 per 10 gram, as against the previous close of Rs 48,021.

“Over the past 12 to 18 months concerns around economic uncertainty due to Covid-19, had abated particularly since vaccines were launched. In fact, a stronger than expected bounce back in major economies has fuelled inflation. Surprisingly, high inflation hasn’t resulted in an increase in demand for gold,” says Dhaval Kapadia, Director – Managed Portfolios, Morningstar Investment Adviser India.

He says this could probably be linked to a couple of factors – several central banks have signaled tapering of monetary stimulus and raising interest rates to curb inflation; gold doesn’t perform very well during periods of rising interest rates as the cost of holding the asset goes up (important factor as Gold doesn’t generate any regular payout unlike equities or bonds).

Mutual fund managers also believe that the hawkish stance of central banks can hit the equity markets across the globe, including India. In such a situation, they believe that an allocation to gold funds can come in handy for hedging the volatility.

“Equity markets in the US and India look stretched by any measure of historical or relative valuations, justified by lower interest rates. However, that justification will be under pressure from rising interest rates without a compensating earnings expansion. As such, Indian investors will benefit from holding gold to protect their portfolios from possible equity market corrections,” says Chirag Mehta, Fund manager- alternative investment, Quantum Mutual Fund.

There is also a possibility of Central banks pausing their rate hike decision to support growth owing to the Omicron threat. Experts believe that this could lead to inflationary pressures, in turn leading to a spike in gold prices. They also believe that global central banks’ gold purchases can be expected to continue in 2022 as they hedge themselves against macroeconomic uncertainties and continue the trend of incrementally diversifying away from the dollar.

Mutual fund managers have been asking investors to use gold funds as a diversifying asset throughout 2021 as well. The continued inflows into gold ETFs in 2021, with AUM touching Rs 18,000 crores as of November shows that investors have been taking the advice seriously.

“Between sticky inflation acting as a tailwind and the Fed’s tightening-induced stronger dollar taking a toll, gold because of conflicting forces is expected to stay range-bound in the first few months of the year. But long-term gold investors will have the last laugh. In the meantime, investors should be patient and use any price corrections as an opportunity to build their gold allocation,” says Chirag Mehta.

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