Gold price at one-year high! What should investors do?

Gold price has rallied to its one-year high, breaching the ₹51,000 per 10 grams mark in February as demand for safe haven assets went up after Russia invaded Ukraine. On Monday, the yellow metal price was hovering around ₹51,200 per 10 grams. Gold has risen by over 7% in February. However, it is still far away from it's all-time high of over ₹57,000 reached in August 2020 amid the pandemic.

In the international market, gold prices were set for their best monthly gains in nine months. The fresh sanctions by the United States on Russia for invading Ukraine pushed the price of yellow metal. Spot gold prices climbed 1.2% to $1,909.89 per ounce while US gold futures were up by 1.1% to $1,908.30. Financial markets will continue to remain vulnerable to geopolitical developments in the immediate future. Gold, which is a much-chased asset class in such times, is set to benefit as risk-averse investors increase exposure to it amid pullbacks in risk assets. However, once the uncertainty on these fronts eases, says Chirag Mehta - senior fund manager - Alternative Investments, Quantum AMC, the gold prices can be expected to sober down.

Russia declared war against Ukraine last week. On Monday, the blasts were heard in the Ukrainian capital of Kyiv and in the major city of Kharkiv. A residential building in the city of Chernihiv in northern Ukraine was on fire after being struck by a missile. As per latest developments, Ukraine has agreed to hold peace talks with Russia. In the meanwhile, Russian President Vladimir Putin has put his nuclear "deterrence forces" on high alert.

In the event of the Russia-Ukraine conflict getting extended or escalated, experts see the already high inflation escalating much higher. "If the war extends, we are looking at more money printing to fund military actions, higher energy prices as supplies from major exporter Russia get hit and economic sanctions against Russia as the NATO fights back," says Chirag Mehta. He adds that all these will fan the fire of already high inflation, take a toll on slowing economic growth and spur market volatility and risk aversion. This environment will be supportive of gold prices but will eventually clash with the Fed's tightening cycle, which is expected to keep gold prices in check.

Gold may remain volatile as market reacts to Russia-Ukraine development however, Ravindra Rao, CMT, EPAT, VP- Head Commodity Research at Kotak Securities, believes the general bias may be on the upside until there are clear signs of de-escalation in tensions.

What should investors do?

While the Russia-Ukraine conflict will be in the headlines for some time now, investors must keep in mind that gold is not a tactical play. One should stick to the fundamentals and allocate 10-15% of their portfolio to this strategic asset class, says Chirag Mehta, that has time and again played a return-enhancing and risk-reducing role in investor portfolios in times of financial, geopolitical or other crisis. Those already invested should thus stay put, but for new investors, Mehta recommends to avoid lumpsum investment at current levels.

In the meantime, the Sovereign Gold Bond (SGB) Scheme 2021-22-Series X has opened for subscription on Monday till March 4. For this tranche of the scheme, the Reserve Bank of India (RBI) has set prices at ₹5,109 per gram of gold. For the uninitiated, SGBs are government-backed securities in denominations of 1 gram and further multiples, which can be considered as a substitute for physical gold, minus the costs of buying, selling, and storing it. The scheme was launched in 2015.

The bonds offer a fixed interest rate of 2.5% per annum, on the basis of the initial investment. This is credited to the investor's account on a semi-annual basis, with the last interest payable on maturity, alongside the principal amount.