Gold as Investment?


GOLD: India’s Obsession

Last couple of years have been challenging for gold as an asset class. After peaking in 2013, prices have corrected to the tune of 20-30%. Indian gold prices had been fallen close to the Rs. 25,000 per 10 grams mark but have since recovered to trade the Rs 26000-27000 zone for some time now.

Many have been losing interest gold as prices seem to be going nowhere. Also, with the magnitude of price decline, many have been disappointed.

With 12 years of positive returns in dollar terms since the year 2001 and about 15 years in Indian Rupee terms since the year 1998, a round of losses seemed around the corner in 2013 as no asset can keep moving up in a straight line! There are bound to be years of correction and consolidation.

In my humble opinion all those complaining haven’t understood gold at all.

It’s sensible to buy gold, dedicate around a 10 to 20% portfolio allocation to it and hope it goes down in price! Sounds strange doesn’t it, however, a careful analysis does make it sound very logical.

Gold generally has a low to negative correlation with most of the other asset classes over the long run. Therefore, when gold prices are not doing well, it is likely that the other major allocations of your portfolio (the remaining 80-90%) may be doing better than gold. On the other hand it might bring respite during the bad times when the other assets are not doing well thus proving to be a good portfolio diversification tool for your portfolio.

In most cases investors are often misguided by the recent performance of any asset class. This is evidently proved in equities. Before the rally in equities that started in May 2014, it looked like a highly disappointing investment but now seems to be an important investment option to almost everyone. This is also true in case of gold. In the year 2011 in dollar and 2013 in INR terms it was one of the favourite asset classes for many.

Investors then viewed gold as a good asset class to own looking at its 3-5 year history. However the rationale for owning gold assets, in any given period remains simple: global deterioration of sovereign credit and a growing need to debase currencies by central bank in order to meet future obligations, whether it’s, in the U.S., Europe or Japan.

We are in a phase of experimental central banking, which I believe is going to end badly due to the dislocations of capital it has caused through prolonged periods of negative rates.

Some of the tail risks facing the global economy may have diminished, but many structural problems remain.

There still exist serious imbalances and problems in many countries, including excessive private and/or public debt, the unsustainable divergence between record corporate profits and steadily declining wages, rising inequality, and mispricing of asset markets at best.

Investors would do well to remember that gold is a time-tested store of wealth and a valuable tool against the numerous downside risks that still persist in the global arena.

If concerns surrounding monetization gains momentum, this could trigger another broad based loss of risk appetite, investors then would no doubt, want to increase their gold holdings. An allocation to gold in such uncertain times is important.

We reiterate that the main reason to own gold is just the sheer fact that it is a good portfolio diversification tool and thereby helping you to reduce overall portfolio risk in the turbulent financial times that we live in.

Data Source: Bloomberg

Shabab Khan
(Author is an Export Entrepreneur.)

© This article is a piece of author opinion based on his knowledge, market trends, experience and does not guarantee the secure investment. Readers discretion is adviced.


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