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Should one invest in gold as inflation is rising?

Dhirendra Kumar explains if it's wise to replace your debt fund investments with gold

Will gold be a better option than a short duration fund due to the rising inflation? How is the metal likely to react?
- Rajendran Nagarajan

Yes, that is the theory that gold should prove to be a more stable and rewarding investment when the interest rates go up. Further, amid uncertainty, it turns out to be a safe haven. But that is the theory.

The real situation is that gold has proven to be very volatile, and various reasons have contributed to its volatility. For one, the changing demand-supply situation has impacted it. Also, we now have customs duty on imports and last year, we were a sizable importer of gold. I think gold has turned out to be the largest item of import in India. So, that is quite scary and disappointing for the government when it is working hard to financialise and free the asset. Government dislikes gold as an investment simply because it is a relatively unproductive asset. When we buy shares or equity mutual funds, the money helps buy ownership of the factories, industry, and services. But when you buy gold, you keep it in the locker, and it stops working. So, in that sense, governments are discouraged. I won't be surprised if the current context contributes far more heavily to the volatility of gold. Keep it simple, be into short-term and ultra-short-term debt funds. That's a way to navigate the likelihood of rising interest rates.

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