Gold prices have crossed the $3000 per ounce mark for the first time in March and continued its upward trajectory to hit a record high of $3454.70 at the LBMA (London Bullion Market Association) on April 22, 2025 before a small correction at $3263.05 on May 2, 2025. From a low of $1618 on September 28, 2022, gold prices have more than doubled (in dollar terms) as of May 2, 2025.

This stellar rise can be attributed to factors such as geopolitical uncertainty, central bank purchases, a weakening dollar, and concerns about inflation, positioning gold as a safe-haven asset.

This stellar price rise makes it a compelling case for investors to consider portfolio diversification in a volatile equity market. Let us look at the reasons which makes gold a vital part of an investor’s portfolio

• Hedge against inflation: Gold has historically maintained its value over time, serving as a hedge against inflation. When the purchasing power of fiat currencies decreases, gold prices tend to rise, protecting investors’ wealth.

• Safe-haven asset: During periods of geopolitical instability or economic turmoil, gold is often viewed as a safe-haven asset. Investors flock to gold with an aim to preserve their capital amid market volatility.

• Diversification: Gold offers diversification benefits due to its low or negative correlation with other asset classes like equities and bonds. Including gold in an investment portfolio can reduce overall risk and enhance returns.

• Liquidity: Gold is a highly liquid asset that can be easily bought or sold in the global market. Gold ETFs (exchange-traded funds), in particular, provide a straightforward and cost-effective way to trade gold without the drawbacks of storing physical gold.

• Central Bank demand: Central banks worldwide hold significant reserves of gold and continue to purchase more, which supports gold prices. This steady demand underscores the importance of gold in global financial systems.

• Wealth management: Gold has been a store of value for centuries and remains a reliable means of preserving wealth for future generations. Its intrinsic value and universal acceptance make it an enduring asset.

• Limited supply: The finite nature of gold, combined with the challenges and costs associated with mining, ensures that its supply remains limited. This scarcity supports its long-term value and investment appeal.

How to invest?

One can invest in gold by buying gold coins, bars or jewellery. However, physical gold can result in storage and security costs, risk of theft, illiquidity and concerns over purity, while in the case of jewellery, one may have to incur making charges as additional cost.

Another way to invest in gold is to buy Gold ETFs that aim to track the domestic physical gold price. Gold ETFs are represented by 99.5 per cent pure physical gold bars that are stored in secured vaults, which are audited periodically. These are listed on the stock exchanges i.e. BSE/NSE or any other exchange, and can be bought or sold anytime through a stockbroker. Unlike gold jewellery, gold ETF can be bought and sold at the same price pan-India.

Over the past 10-15 years, assets under management of gold ETFs have grown from merely ₹300 crore in 2007 to over ₹55,000 crore in February 2025. After the emergence of SGB (Sovereign Gold Bonds) in 2015, the demand for gold ETFs flattened out. However, with recent indications of new SGBs being out of proposition, gold ETFs may become a natural choice for investors.

Weak domestic equities are driving investors to gold ETFs for diversification, resulting in net flows of over ₹11,000 crore in the past six months ended February 2025. Market experts note that while the gold price rally has slowed, it remains strong due to high geopolitical risks, US trade policies, and demand from global central banks. However, high gold prices may pressure consumer jewellery demand.

The US Federal Reserve’s stable interest-rate policy also impacts this. Gold consistently proves to be an excellent diversifier for long-term wealth creation, with a recommended allocation of 10-15 per cent to reduce portfolio volatility.

The writer is head – passives, Axis Mutual Fund