Should You Invest In Gold ETFs And Funds Amid Falling Prices?

Gold Exchange Traded Funds (ETFs) have declined between 4.2 and 6.5 per cent over the past three months (data as on July 15).

- Sudipta Mitu

Generally, when the equity markets are underperforming, gold tends to do well, and thereby provides some protection to investors’ portfolios. The decline over the past quarter has therefore left investors bewildered and raised questions about whether they should continue to hold gold in the portfolio.

Interest rate hikes causing bearishness

As you would be aware, we in India are price takers. This essentially means that the price of gold is determined by events in the international markets. The price in India is equivalent to the price in the international market, adjusted for import duty, and the rupee’s movement against the US dollar. To understand what is happening to gold, therefore, we need to look at developments in the international market, primarily the US.

The CPI numbers have been unexpectedly high in the US. They came in at 8.6 per cent in May and 9.1 per cent in June (year-on-year). It has been more than a year since the inflation numbers have been significantly above the US Federal Reserve’s (Fed) target rate of 2 per cent. The expectation within the market, therefore, is that the US Fed will hike interest rates and also tighten liquidity at a faster pace.