Investors should use correction to build allocation to gold: Experts

12-15% allocation is a must to counter volatility in equities

Gold has lost some of its shine in recent days. Its spot price stood at Rs 46,360 per 10 grams on Tuesday — down Rs 9,541, or 17.1 per cent, from the high of Rs 55,901 per 10 gram reached on August 7, 2020.  

Losing lustre  

A rise in US treasury yields has sent the yellow metal tumbling. Gold has a negative correlation with real interest rates. Low or negative real interest rates are positive for gold by reducing the attractiveness of holding bonds.    

The strengthening of the dollar against major currencies recently is another reason. Since gold is priced in dollars in the international market, the strengthening of the greenback leads to fall in the price.    

Expectations of a larger fiscal stimulus package have added to the pressure. Ajay Kedia, director, Kedia Advisory, says, “The stimulus will lead to increased liquidity in the market. It will also result in increased buying of risky assets. Money may move away from gold, as has happened in recent months.”

The ongoing vaccination drive is another reason. Tarun Birani, founder and chief executive officer, TBNG Capital Advisors, says, “The optimism that vaccines will aid global economic recovery has also caused gold prices to soften.”

A lot of funds are flowing into bitcoins, which has risen more than 90 per cent in the current year. A lot of the money that would otherwise have been allocated to gold has moved to bitcoin.

Has the rally ended?  

Experts believe it may be too early to turn pessimistic on gold.

“Keeping the geopolitical and trade-related tensions, and overall economic uncertainty due to the pandemic, gold’s outlook remains positive,” says Kedia.

Some experts expect gold to decline further and then stabilise.

Naveen Mathur, director of commodities and currencies, Anand Rathi Share & Stock Brokers, says, “There may be a Rs 2,000-fall in India. Globally it may decline from around $1,800 per ounce (oz) to $1,750 per oz. Its investment appeal has lessened to an extent as people have moved to risky assets. But until we are out of the pandemic, gold’s price may not decline too much. Rather it may stabilise.”  

What should investors do?

Experts say the correction has provided a good buying opportunity to investors. “You should always maintain an allocation to gold as it has the ability to counterbalance any correction in the equity market,” says Mathur.

New investors, who don’t have an allocation to gold, should use the current correction to build it. Kedia says investors should maintain a 12-15 per cent allocation.

Existing investors, who already have an allocation, should not think of exiting. “Those who have already bought gold should continue to hold it and maintain their optimal asset allocation to the yellow metal in their portfolio,” says Birani. If their allocation has dipped below the ideal level, they should accumulate gold in a staggered manner.

The best avenues for investing in gold are sovereign gold bonds (SGB) and gold exchange-traded funds (ETFs). SGBs are government-backed securities, which pay 2.5 per cent fixed rate of interest per annum on the initial amount invested. SGBs, however, are not liquid. In the case of gold ETFs, investors have to pay an annual expense ratio, but they are very liquid and one can exit them easily.