Gold -- a source of return on investments amid monetary policy tightening: WGC
Aug 10, 2022
New Delhi [India], August 10 : Against the backdrop of monetary policy tightening by several central banks including the Reserve Bank of India, gold as an asset may offer investors a source of return on their investments and effective diversification of the portfolio, said World Gold Council in its latest Investment Update.
Gold is widely considered a safe-haven asset and a hedge against volatility in financial markets.
"Interest rate hikes are driven by rising inflation. In the short term, higher rates are a headwind for gold, but in the current environment they remain historically low - in real terms mostly negative across developed markets," the council said.
Historical data, the council said, shows that gold has offered attractive returns during India's monetary-tightening cycles. In five rate-hiking cycles since 2004 gold in Indian rupees averaged an annualised return of 19.5 per cent, outperforming other major assets.
For instance, over the past 41 years, gold has delivered an average annual return of 10 per cent in rupees, clearly outperforming retail inflation, which grew by an average of 7.3 per cent over the same period.
Gold's performance has also been particularly strong in periods of high inflation, increasing by 12 per cent on average when inflation rose above 6 per cent, it said.
Central banks around the world have responded to rising inflation. The US, the UK and Canada have raised interest rates, while the US Federal Reserve and European Central Bank (ECB) have rolled back their emergency pandemic support for the economy, it added.
For the record, faced with an over four-decade high inflation in the country, the US Federal Open Market Committee had in its latest meeting raised the key policy interest rate by 75 basis points to 2.25-2.50 per cent. Hiking interest rates typically cool demand in the economy, thereby putting a brake on the inflation rate.
The monetary policy committee of the Reserve Bank of India has raised the repo rate by 50 basis points to 5.40 per cent in order to contain the persistently high inflation. The latest hike takes the repo rate above pre-pandemic levels of 5.15 per cent. RBI has so far hiked the key repo rates -- the rate at which the central bank of a country lends money to commercial banks -- by 140 basis points.
In India, retail inflation has been over the RBI's upper tolerance band of 6 per cent for the sixth consecutive month in a row in June. Retail inflation was at 7.01 per cent in June. Inflation data for July is due on Friday.
