Gold & Net Zero Goal
Holding gold in a diversified portfolio can help reduce carbon footprint without sacrificing returns, writes V.P. Nandakumar, MD & CEO of Manappuram Finance Ltd
Gold is slowly but steadily assuming a more important role in the myriad world of investment as the recent volatility in the financial markets across the globe has rendered many an investment style of the past redundant. A case in point is the fast-losing relevance of the 60:40 portfolio strategy – 60% in stocks and 40% in bonds – after the turbulence in the stock markets and ructions in the debt segment hit the investment world last year. Conventional investments strategy is under fresh tests after the major central banks across the world made a pivot to hawkish policy stance followed by aggressively hiking policy rates and flipping to monetary tightening in a bid to control inflation and ease price pressures. For instance, the Reserve Bank of India has so far delivered a cumulative 250 basis points (2.50%) increase in benchmark repo rate in the current policy cycle in this financial year to get the inflation back to its upper tolerance limit of 4%.
The net effect of higher prices crimping aggregate demand accompanied by supply shocks transmitted through spiraling cost of energy and other key inputs have landed equity markets in unchartered waters. At the same time, it has exacerbated the ruction in the bond market with the yield curve inverting following persistent high inflation. An inverted yield curve occurs when short-term debt instruments have higher yields than long-tenure papers of the same credit or risk profile. Investors have found themselves caught between a rock and a hard space as the volatile stock markets and bond market are on a boil with yield inversion prompting many experts and commentators to tow a rather cynical line saying investors have no place to hide till both the equity and debt markets find their feet again. However, I would beg to differ with this negative view by saying that investors still have a very safe haven to park their money if only they care to see. In fact, such an opportunity is in their plain view but many investors are hoodwinked by the orthodox investment ideas like the 60:40 norm that excludes gold in the portfolio mixes of investors. Financial advisors and investment gurus often keep the yellow metal out from their portfolio recommendations citing the non-yielding nature of the gold.
As legendary British economist, the late Joan Robinson once famously said, “Whatever you can say about India, the opposite is also true.” And this holds good for the yellow metal as well. It is true that gold held in its physical form does not bring any return measured in terms of interest or yield. But when the financial markets are in uncharted territory, having gold in one’s portfolio brings both tangible and intangible benefits for investors. It is true that for the past one year or so, gold prices were on the retreat since financial conditions were favouring the US currency which appreciated by nearly 10% year-to-date against all other major currencies and hence assets. However, since March 20, the yellow metal prices staged a smart comeback with spot gold prices hitting Rs 60,000 per 10 grams across major Indian markets.
The sudden course correction in the value of gold is not unexpected since gold as a hedge against inflation is a time-tested truism. Despite aggressive tightening to drain excess liquidity from the system for more than a year, central banks realised much to their discomfort that price pressures still remain stubborn and tighter liquidity conditions are creating fresh systemic risks with small and big banks alike in the West — from the Silicon Valley Bank to Credit Suisse — collapsing like nine pins. The point I want to make here is straight and simple; compared to equity or debt, gold prices remained rather stable, a factor that may be appealing for risk-off investors. Also, an inflation-beating appreciation in the value of the underlying asset — gold – is what this class of investors could best desire in these uncertain times.
Also, to say that holding non-yielding gold in a portfolio is tantamount to financial vice is wrong since gold has always given an above-average return – surely not market-beating returns or generating alpha as some equity enthusiasts claim about some stocks. To put it simply, the long-term average returns that gold delivered to the investors over the past 20 years is close to 8%, something that no competing asset class can lay claim on. Growth in the real value – adjusted for inflation — of the yellow metal has never turned negative through any economic cycles though temporary flips are part and parcel of the market dynamics.
And finally, there is another compelling reason to invest in gold – its increasing value as a net-zero asset. The investment world has gone through a sea change in the past couple of years with climate concerns becoming the guiding principle for investors who manage several trillion dollars-worth of assets every year. Though, a consensus on a broader and widely accepted framework for these green finances under the management of institutions still remains elusive, I strongly believe that including gold in the investment portfolio of individual investors could contribute to the climate cause by directing finance from polluters to industries that are eco-friendly. Here, I am not going to reiterate the age-old argument that gold mining contributes less to carbon emission compared to other metals since such arguments seek to score brownie points not based on its merits but based on others’ defects. What I am trying to pitch hard is if only a fraction of assets under management of the wealth managers across the world can move to gold, then the impact it can make will be tremendous. For instance, the AUM managed by the Mutual Fund industry in India as of February this year was a staggering Rs 39,46,257 crore or Rs 39 trillion. And if a fraction of this could be moved to investment in gold by adding them to the individual portfolios, then that will be tantamount to investing a considerable amount of money in energy transition. This is because resetting portfolios can bring immediate climate benefits by directing the money to green industries as well as bring decent returns to investors while investing in transitional technologies will yield tangible results with considerable lag. Also, there are millions of investors out there who invest to make an impact – social, climate or governance – though the returns from investments may be a few basis points lower compared to returns from investments from conventional strategies.
The case for such a shift in investment style was amplified with the UN Intergovernmental Panel on Climate Change in its latest report changing its climate warning from ‘Code Blue’ to ‘Code Red’. To echo the warning made by United Nations Secretary-General Antonio Guterres: “Humanity is on thin ice and that ice is melting fast. Our world needs climate action on all fronts everything, everywhere, all at once.” Therefore, let us open a new front in climate action by striking a balance between financial goals with the wider interest of the planet by including the net zero asset gold in everyone’s investment portfolio
Picture Courtesy: Pegasus Photography/images are subject to copyright
