This Akshaya Tritiya is an opportune time for purchasing gold

On an auspicious day like Akshaya Tritiya, we Indians always turn to gold. The precious metal's imperishable and timeless qualities make it an ideal pick on such days that mark prosperity and wealth in Indian culture.

If someone bought gold last Akshaya Tritiya, which was an opportune time, gold has given returns up to 15 per cent since then.

Though it is advisable to purchase gold in a strategic and staggered manner in order to average out purchase cost, and diversify your portfolio with at 10-15 per cent allocation to gold at all times, the question facing us this Akshaya Tritiya is whether we should do a token purchase, or can we buy more on this auspicious day towards building our gold allocation?

This Akshaya Tritiya seems like an opportune time to load up your purchase as the macroeconomic backdrop and risk-reward dynamics seem to favour gold and the downside looks limited.

Domestic gold prices are derived from international gold prices. International gold prices are priced in US dollars and hence, the dynamics of the US economy are big drivers of gold prices. Expectations of a monetary policy pivot by the Federal Reserve are gathering steam after a regional banking crisis in the United States made the economic impact of higher interest rates apparent.

It's likely that more damage to the financial system is yet to be revealed. Vulnerability in the financial system is expected to get further complicated if we see a recession in the United States. The probability of a US recession in the next 12 months is high with Treasury yield curves in the US staying inverted for the 9th consecutive month. Policymakers have also cut US growth forecasts.

Further deterioration in economic conditions could drive risk aversion, hurt risk assets and lead gold prices up.

The current background of a slowing US economy and financial instability limits the Fed's ability to stay hawkish. The US Central Bank's projections of its terminal rate are at 5-5.25 per cent, which is one 25 basis point rate hike away. A pause in the Fed's hiking cycle, which is likely in the foreseeable future, will be supportive of gold prices. An eventual cut in interest rates to support economic growth or calm financial market panic, the timing of which remains uncertain as of now, will be bullish for gold prices.

On the other hand, inflation in the US continues to stay stubbornly high, above the tolerable level for policy makers. This mix of higher inflation, slowing growth and limited headroom for monetary policy bodes well for gold prices. Gold can be a useful portfolio diversification tool amid the prevailing economic uncertainty and therefore deserves a meaningful portfolio allocation. One can use the recent consolidation in prices from all-time high levels to their advantage.

While investing in gold this Akshaya Tritiya, financial avenues like Gold ETFs and Gold Savings Funds can be the proverbial 'Sone pe Suhaga' with benefits such as purity, price efficiency and liquidity, augmenting your investment. Remember, gold is an excellent portfolio diversifier, and liquid alternatives like these that are backed by gold can enhance timely and efficient portfolio rebalancing. Choose well.

(The writer is Fund Manager - Alternate Investments, Quantum AMC.)