Gold ETF allocation: A safe-haven asset for uncertain times

The recent eruption of violence in Israel has ignited investor interest in safe-haven assets, in light of escalating geopolitical concerns in the Middle East. As geopolitical risks continue to surge, investors are gravitating toward assets like gold, thanks in part to an uncertain US interest rate trajectory. All of these factors underscore the rationale for strategic allocation to this precious metal, particularly through cost-effective vehicles such as gold exchange-traded fund (ETF).

Emerging risk

Let us delve into the emerging geopolitical risk and its connection to gold. Gold’s well-established role as a hedge against international turmoil is widely recognised. The Israel-related geopolitical risk represents a novel concern for global investors, with energy prices now under close scrutiny as oil prices have surged since the start of the crisis. The extent of its impact on the market will hinge on its duration and the potential involvement of other nations. As investors carefully assess geopolitical risks in the Middle East, safe haven assets like gold will be in focus.

The Fed’s role

The situation regarding US interest rates demands attention. The uncertain trajectory of US interest rates is further enhancing the allure of gold. Investors have deferred their expectations for interest rate cuts until June 2024. Fears of the Federal Reserve overtightening, coupled with concerns about a potential US recession, escalating US debt levels, persistent inflation, have once again placed the spotlight on the yellow metal. With savings accumulated during the pandemic era dwindling, credit card debt on the rise, and interest rates remaining elevated, the risk of a hard landing for the US economy persists.

As the financial industry acknowledges this slowdown, and as it begins to manifest itself in asset markets, the Fed may find itself compelled to execute a U-turn, ushering in a new era of prosperity for gold.

Favourable winds

The global economy now stands at a crucial juncture, offering favourable implications for gold as an asset class. Historically, mild recessions and weaker earnings have proven to be conducive to gold’s performance. Furthermore, a weakening dollar as inflation recedes could provide further support for gold. Geopolitical flare-ups are expected to continue bolstering gold’s position as a valuable risk hedge. Interestingly, Chinese economic growth is anticipated to improve in the coming year, which should stimulate consumer demand for gold. 

Strategic allocation

Gold plays an indispensable role as a strategic long-term investment and serves as a cornerstone within a well-diversified portfolio. Gold is a highly liquid asset, free from any liability or credit risk, and its scarcity has historically preserved its value over time. Moreover, gold enjoys diverse sources of demand, serving as an investment, a reserve asset, a component of gold jewellery, and a technology component. Over time, investors who have stayed put with their allocation to the yellow metal have capitalised on its status as a safe haven during times of economic uncertainty.

One of the simplest and most cost-effective ways to establish or augment a strategic allocation to gold is through gold ETF. The ETF relies on an open-ended structure that mirrors domestic gold prices, providing a straightforward and passive means of investing in gold. An investor need not wait to accumulate substantial sum to begin investing in Gold ETF. 

When selecting a gold ETF, opt for a fund with substantial track record, minimal tracking error and low expense ratio. However, one needs a demat account to hold ETF units. For those without a demat account, can consider purchasing Gold through Gold Fund of Fund.

Here, just like any other mutual fund, one can initiate a SIP as well. In terms of asset allocation, investors may consider an up to 10 per cent allocation to gold.