New investors should gradually build a 5 to 10 per cent allocation to gold.
The rupee hit a new low of Rs 84.5 against the US dollar recently.
While the Indian currency is down only 1.3 per cent year-to-date, the fall has been sharper over the medium and long term: 3.3 per cent compounded annually over five years and 3.1 per cent over 10 years.
What caused the fall?
The primary cause of the rupee's decline against the US dollar is the latter's broad-based strengthening against major global currencies.
This trend accelerated following Donald Trump's victory.
In the first term, he had implemented pro-growth policies, like significant corporate tax cuts, which had benefited corporate America.
Investors anticipate similar aggressive policies from him that could spur growth in the US economy.
"The expectation that Trump might impose high tariffs on other countries is also strengthening the US dollar," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
US corporate performance has also bolstered the dollar.
"In the recently announced third-quarter earnings, over 70 per cent of US companies posted results that exceeded market expectations.
"The strength of these earnings has reinforced confidence in the US economy and corporate sector, attracting global capital," says Sapna Narang, managing partner, Capital League.
Outflows from the Indian capital market have also played a part, driven by overvaluation in the Indian market, the economic stimulus in China, and persistent high interest rates in the US due to expectations of increased government spending, tax reductions, and hence slower rate cuts.
Long-term phenomenon
The rupee's depreciation against the US dollar is also a long-term trend.
"Countries with higher productivity, lower trade deficits, and lower inflation have stronger currencies," says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.
Dollar goals impacted
All goals involving dollar-denominated spending become more expensive.
These include foreign education, overseas vacations, and financial support to family members abroad.
"Even the cost of purchasing commodities like gold, used heavily in Indian weddings, increases," says Kumar.
Invest in US equity funds
Investments in US equity funds, denominated in dollars, benefit from currency depreciation.
If the rupee weakens, the dollar value of these funds increases, generating returns even if the underlying US asset prices remain unchanged. Kumar says investing in US equity funds provides the added benefit of geographic diversification.
Narang cautions that foreign funds should form a small part of the portfolio.
"The goal is to diversify and participate in global growth, not purely to hedge against currency movements," she says.
According to Dhawan, the exposure to US equity funds should be capped at 10 to 20 per cent of the equity portfolio.
He advises using systematic investment plans (SIPs) or systematic transfer plans (STPs) to mitigate valuation risk.
Investors should avoid overinvesting in US equities based on recent performance.
Add gold to portfolio
Gold, priced in US dollars in the international market, serves as a hedge against currency depreciation.
When the rupee depreciates, the value of gold in rupee terms increases, providing a currency hedge.
Dhawan cautions against overexposure.
"If interest rates in the US rise, that could hurt gold prices. A 5 to 10 per cent exposure to gold in the portfolio is adequate to hedge against currency risk," he says.
Investors may use gold exchange-traded funds (ETFs) or mutual funds, depending on which product they are comfortable with and whether they have a demat account.
Kumar recommends the latter for ease of access and liquidity. Invest in gold, too, via SIP or STP.
Sanjay Kumar Singh, Karthik Jerome
Goldman Sachs expects gold to reach $3,150 per ounce in the international market by December 2025, up around 19.1 per cent from its current level of $2,645, according to a recent report in Business Standard.
Domestically, gold is trading at Rs 76,018 per 10 grams after delivering a remarkable 21.9 per cent return in the past year.
The question is whether it can replicate this performance in the year ahead.
Central bank buying may persist
Several factors continue to support gold demand.
"The main drivers of this rally have been central bank buying and physical demand, not investment or speculative flows," says Vikram Dhawan, head commodities and fund manager, Nippon India Mutual Fund.
Robust demand from Chinese retail investors has been a significant contributor.
Central banks are expected to persist with gold purchases amid macroeconomic (high debt levels in the United States, for instance) and geopolitical risks.
Gold exchange-traded funds (ETFs) may also see increased inflows.
"With most global investors being underweight on gold, many might allocate to it to diversify their portfolios," says Dhawan.
According to Manav Modi, senior analyst, commodity research, Motilal Oswal Financial Services, interest rate cuts in the US could also boost gold's appeal.
Geopolitical tensions remain high. "The conflict in West Asia has the potential to disrupt oil supplies and cause an increase in inflation, which would boost gold demand," says Deveya Gaglani, senior research analyst, commodities, Axis Securities.
US-China trade friction could also drive investors into this safe-haven asset.
A depreciating rupee has the potential to enhance gold's domestic return.
"The rupee, which has been stable for two years, is now trading at lifetime lows against the dollar and could depreciate further," says Modi.
High prices could be a deterrent
High gold prices, however, have the potential to dampen demand.
"Whenever there is a sharp spike in prices, as happened over the past year, demand tends to lag, as retail investors wait for better price points," says Dhawan.
Central banks, too, might adopt a similar strategy. Improvement in US GDP figures, easing of tensions in West Asia, and stable or rising interest rates in the US are other factors that could hurt gold prices, according to Modi.
Oversupply from increased mining output or reduced jewellery demand, particularly in key markets like China and India, could exert pressure on gold's price, according to Gaglani.
Competition from equities and cryptocurrencies could divert investor interest.
Returns may be subdued
Experts believe the extraordinary returns of the past year are unlikely to continue.
"While gold's long-term story remains intact, we could see some consolidation in the near term," says Dhawan. Modi anticipates a 5 to 7 per cent correction.
What should you do?
New investors should gradually build a 5 to 10 per cent allocation to gold.
"Those planning to use gold in a wedding should also begin accumulating it," says Abhishek Kumar, founder, SahajMoney.com.
However, he warns that the holding period must be three years or more for those entering now.
Dhawan suggests that existing investors maintain a consistent allocation, irrespective of whether they are in a risk-on or risk-off environment.
Gaglani advises that long-term investors accumulate gold if there is a 5 to 7 per cent price correction.
To select a gold ETF, Kumar advises focusing on low expense ratio, low tracking error, and high trading volume.
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Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
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