There is no need to go overboard on the yellow metal, stick to investing only ten per cent in it.
The frenzy around gold is aping the metal’s price movement. Investors’ inclination towards gold is also hitting new highs as easily as its market price, which has been constantly touching new highs almost everyday.
After a small fall last week, gold prices recovered to over Rs 27,000 per 10 grams, this week. On Friday, the yellow metal closed at nearly Rs 28,000. In the last one year, gold has returned nearly 45 per cent and in six months, the metal has given over 30 per cent.
Here on, gold prices should rise irrespective of whether we see an economic boom (rising inflation will lead to currency debasement and an increased demand for real assets) or a bust (gold will rise on safe haven buying). The sustained run-up over the years has led to some interesting change in investors’ behaviour.
| GOLDEN RULES |
| * Gold-heavy portfolio may not be good investment decision |
| * Opt for an asset allocation based on your risk profile, investment horizon |
| * Present market conditions warrant buying equity, as these are cheaper |
| * Shift gains made on gold to buy more equity for higher growth |
| * Equities are high growth instrument, while gold can be a portfolio hedge |
| * Once the global uncertainties die down, equities will move up and gold may correct |
Seeing this investors have become adamant on having a gold heavy portfolio. As financial planners, we always stress upon the need to have a proper asset allocation – 60-70 per cent in equity, 20-30 per cent in debt and 10 per cent in gold. But, seeing the kind of favour gold is getting, our resolve is also being tested.
During this phase of equity prices sliding and gold prices surging, ideally, investors should shift the gains made from gold to equity. Falling markets are the best time to purchase equities. Unfortunately, clients want to go the other way round. They don’t mind booking heavy losses in shares, equity funds and want to switch to either gold ETFs or physical gold.
Importantly, equities are cheaper right now and these only give the growth booster to any portfolio. Gold is an alternate asset class, a safe haven and does not give high returns like equities. Hence, it cannot form the core of any portfolio.
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Some of them wish to discontinue their systematic investment in equity mutual funds and start a 20-year SIPs (systematic investment plans) in gold mutual funds. They believe that the good times in gold will continue far into the future. However, this may or may not happen.
Apart from the obvious hazards of a having a lop-sided portfolio, such investors may also get exposed to another danger – ignoring correlations. Historically, gold and equity have moved in opposite directions or share an inverse relation, that is, when gold gained, equity lost and vice versa. But for the past two years (since mid-2009 till late 2010), both the asset classes have moved virtually in tandem.
However, the older relation appears to be reinforcing itself recently, with both equity and gold moving in opposite directions. In case this trend accelerates, the odds of gold moving up further and equities continuing to fall sharply appears to be remote. Hence, the reward for buying equities and selling gold increases with every sharp fall in equities and every perpendicular rise in the price of gold.
Investors’ hazardous investment decision is also gaining momentum due to what they are reading in publications and hearing on news channels. Publications and television channels are showing ‘gold experts’ trying to predict where the price of gold is headed from here. Nine out of ten of these ‘experts’ are bullish on the yellow metal with price targets ranging from $2,000 to $3,000 per ounce over the next one year or so.
Companies offering loan-against-gold are advertising like never before, implying that they are confident of the gold price remaining at these levels. Many jewellers are advertising their old gold savings scheme like never before. Some mutual funds have even launched structured products involving investment in both equities and gold.
It may be right to allocate a small portion of your portfolio to tactical investments. However, it is vital not to invest money based on mere guesses regarding short-term price movements and on hopes that past performance can continue till eternity. Remember, no one can say which way will the market move and past performance is not the mirror of the future.
Always stick to a plan for your portfolio, preferable designed by a financial planner based on your risk taking ability and future goals. But, for now beware of the yellow fever.
Traditionally, Indians have had an enduring love for gold. The lull period of 1980s and 1990s tested the conviction of the most ardent investor. But, the past decade handsomely rewarded those who kept faith. The launch of the first gold exchange-traded fund (ETF) in India in early 2007 helped gold emerge as a mainstream asset class even among those who generally preferred investing in financial instruments.
The number of gold ETFs has steadily risen. In fact, around 60 per cent of gold ETFs have been launched in the past year or so – a sign that mutual funds want to capitalise on the popularity of the metal. Some have even launched asset allocation funds which contain a slice of gold. Like Religare MIP Plus, Axis Triple Advantage Fund, Taurus Gold-edged MIP. These funds up to 25 per cent in each equity and gold, between 60 and 90 per cent in debt.
The writer is vice president, Parag Parikh Financial Advisory Services