Israel-Iran fear routs stock markets. Time to buy gold now?

Geopolitical tensions often push investors to rethink their portfolios. The recent flare-up in the Middle East — with Israel launching a wave of strikes on Iran — has reignited interest in gold. And predictably, gold prices have surged, crossing the Rs 1 lakh mark today (Friday, June 13). But does that mean you should rush to buy gold funds?

Let’s examine the recent historical context and data.

Gold shines in times of fear

Gold has long been considered a safe haven during times of uncertainty. When war clouds gather or markets turn volatile, investors around the world flock to gold, pushing its price up. As a result, gold prices have annually shot up 23.09 per cent in the last three years.

A similar spike in the bullion played out last year as well, when reports of military strikes in the Middle East caused global equity markets to wobble. Due to the uncertainty, gold prices rallied to record highs, going from nearly $66,000 per kg in March 2024 to topping $78,000 per kg just two months later, as per the World Gold Council.

So, do gold funds make sense now?

While it’s true that the yellow metal has outperformed during recent crises, investors need to be cautious.

Gold has already shot up nearly 34 per cent in the last 12 months due to a rash of reasons, including a) global equities sliding, b) crude oil climbing on supply fears after Israel’s attack on Iran, c) slipping bond yields and d) weakening US dollar in the recent weeks and months.

Hence, buying gold after such a run-up may lead to disappointing returns in the near term. Instead, gold is best used as a hedge, not a high-return instrument. A gold allocation of around 5–10 per cent in your portfolio can add stability, especially during global uncertainty.

How to buy gold?

The easiest way to get that exposure? Not physical gold because it carries storage and security concerns, but through the following two options:

• Gold mutual funds
• Gold ETF

They sound similar and both help you invest in gold, but there are some key differences that can affect your returns.

If you choose a gold mutual fund, you can start with a small amount and even set up an SIP (Systematic Investment Plan). It's super convenient. However, you pay more in fees. That’s because you’re not just paying for the mutual fund, but also for the gold ETF it invests in. So, some of your returns go toward those extra costs.

On the other hand, gold ETFs are cheaper to run, so you get to keep more of what you earn. Also, from a tax point of view, gold ETFs have a shorter holding period to qualify for long-term capital gains tax. That makes them a bit more tax-friendly compared to gold mutual funds. On the flip side, though, gold ETFs don’t offer SIP facilities.

Our take

Don’t rush to gold because of headlines. But if you don’t have any gold exposure, this may be a good time to consider getting a 5-10 per cent exposure, not for short-term gains, but to balance your portfolio.

Also read: Is gold a relic or a refuge?