Gold prices soared to their highest levels in a year as investors sought a haven from tumbling stock prices after Federal Reserve Chair Janet Yellen suggested the central bank may delay raising interest rates.
India's benchmark indices - the BSE Sensex and Nifty have slumped by 12.3% and 12.4% respectively in the calendar year so far, witnessing heavy selling pressures from foreign institutional investors (FIIs) who have already pulled out more than US$1.8 billion from Indian equities in 2016.
With a growing number of central banks resorting to negative interest rates to stimulate growth, investors were drawn to gold as an ultimate store of value, fearing that the unprecedented monetary experiments would eventually lead to currency devaluations.
As a result, the price of gold has risen 17% since the start of the year amid all of the continued turmoil in global financial markets, signs of weaker growth, and diminished expectations for rate increases in the USA.
In a negative interest rate scenario, investors would be paying banks to hold their money. But with stock markets being at their volatile best, Investors are seemingly resorting to protecting their wealth by buying gold.
As per Mr Somasundaram, the Managing Director for World Gold Council (India) stated, 'Stock volatility and growth concerns will boost the appeal of gold as a store of value and consumers in China and India may buy more'.
We at Equitymaster maintain our view of having a small chunk of one's portfolio invested in gold as an insurance against the all the chaos surrounding the world. An exposure of 5% to 10% is suggested.
Data Source:ACE Equity, bullionvault.com