In gold exchange traded funds (ETFs), what should be the ideal holding period and considering that gold prices at not moving much, should I shift from gold ETFs to other equity funds?

Gold plays an important role as a diversifier in a portfolio due to its low correlation with other asset classes and is seen as a safe-haven asset in times of global risk-off sentiment. It is seen as a store of wealth, and a hedge against inflation and currency depreciation.

Gold’s importance as a diversifier has been re-instated even as recently as in 2020, as it witnessed a drawdown of only ~11% (S&P GSCI Gold Spot index) compared to ~38% drawdown by domestic equities (S&P BSE 500 TR Index) in the COVID-19 pandemic led sell-off in markets in February-March 2020. Also, gold has outperformed Indian equities in three of the last five calendar years as of 2021 (in INR terms). Gold witnessed a sharp rally till August 2020 owing to risk-off sentiment following the outbreak Covid-19 pandemic and unprecedented liquidity support by global central banks, and also owing to concerns around the U.S.-China trade war and Brexit prior to the pandemic outbreak. However, gold prices have declined ~12% (as of January 20, 2022) since the peaks of August 2020 owing to risk-on sentiment following optimism over global economic recovery and positive developments around vaccine roll-outs.

Over the long term, gold prices would react (inversely) to the pace and extent of the global economic recovery, monetary conditions in place amid the then inflation levels and relative valuations of other asset classes. Gold can go through long periods of underperformance as evident from its historical performance. Follow an asset allocation-based approach. While fixed-income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run. It is advisable to have some allocation to gold (~5-10%) for diversification benefits. Allocation to other asset classes should be in line with your recommended asset-allocation which in turn would depend on your risk-appetite. In terms of investing options, consider RBI Gold Sovereign Bonds which offer a marginal rate of interest on the investment and track gold prices.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com