The TINA factor in India's neighbourhood that's driving Gold's record rally

The TINA factor in India’s neighbourhood that’s driving Gold’s record rally

Worsening geopolitical tensions, wars in Middle East and Ukraine, and the prospect of lower US interest rates all burnish gold’s billing as an investment. But juicing gold’s record rally of above $2,400 an ounce this year is the TINA (there is no alternative) factor in China, with retail shoppers, investors, futures traders and central bank, all turning to the bullion in uncertain times.

Chinese consumption of jewelry, bars and coins have swelled to record levels since last year. Beijing’s gold jewelry demand rose 10% while India’s fell 6%. Chinese bar and coin investments, meanwhile, surged 28%.

And there’s still room for demand to grow, Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights Ltd said in a Bloomberg report. Amid limited investment options in China, the protracted crisis in its property sector, volatile stock markets and a weakening yuan are all driving money to assets that are perceived to be safer.

Klapwijk doesn’t see much alternative in China. “With exchange controls and capital controls, you can’t just look at other markets to put your money into.”

Although China mines more gold than any other country, it still needs to import a lot and the quantities are getting larger. In the last two years, overseas purchases totaled over 2,800 tons — more than all of the metal that backs exchange-traded funds around the world, or about a third of the stockpiles held by the US Federal Reserve.

The pace of shipments has accelerated lately. Imports surged in the run-up to China’s Lunar New Year, a peak season for gifts, and over the first two months of the year are 53% higher than they were in 2023.

The People’s Bank of China has been on a buying spree for 17 straight months, its longest-ever run of purchases, as it looks to diversify its reserves away from the dollar and hedge against currency depreciation.

So, good time to go for gold?

Harshad Chetanwala, Co-founder of financial planning firm MyWealthGrowth.com and a Certified Financial Planner, says investors are often lured to the yellow metal when prices rise. Such an approach might not yield the desired outcome, as gold prices can remain static for long periods.

Moreover, going overweight on gold may prove damaging. Chetanwala suggests that investors refrain from investing in gold jewellery because of the costs associated with it. He urges investors to build a gold portfolio gradually, as it is essential for diversification, and not worry about price fluctuations.

“Given gold’s current price trend, it is advisable to include gold in your investment portfolio, keeping a recommended exposure of 10-15%,” notes Shetty. However, when considering gold purchases during price surges, investors must align their decision with financial goals and understand the potential risks.

Chetanwala suggests investing in gold through sovereign gold bonds (SGBs), underscoring the benefits of the annual interest and exemption from capital gains if held until maturity. He believes it’s an optimal investment choice for those who are not overly worried about the maximum limit of 4 kg per PAN.

Mrin Agarwal, a financial educator, agrees. She favours SGBs over physical gold because it doesn’t entail costs, offers tax-free returns on maturity, and doesn’t face storage or safety issues. She recommends a 15% allocation to gold in a portfolio and says investors must be clear about the holding period of the investment. If the holding period is eight years or more, SGBs are the better choice, whereas gold ETFs are recommended for shorter holding periods.

Chasing short-term gains in such uncertain times with a volatile asset like gold is at present may not be the ideal investment choice. But considered in the cold light of reason, it essential for a diversified portfolio.

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