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Gold has steam left. Buy, hold, sell?

Gold has steam left. Buy, hold, sell?
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First Published: Tue, Jun 01 2010. 07 42 PM IST

Updated: Tue, Jun 01 2010. 07 42 PM IST
Every few months it seems that gold will run out of steam, but the golden engine is still running strong. Capital gains, or the difference between the buying and selling price of an asset, from gold have beaten the usual growth horse—equities.
Over a five-year period, gold has given a compounded return of 25% compared with 20% by the Sensex. The 28% three-year return for gold has significantly outrun the just over 5% Sensex return. Even the one-year return shows gold ahead at 25% compared with almost 16% for the Sensex.
But, historically, gold has underperformed equities and is not known as an asset class that throws off great returns or dividends. So, in the present scenario, the question that investors are asking is: how much steam is left in gold and what should we be doing now? Mint Money attempts some answers.
Also See Shining Bright (Graphic)
How much steam is left in gold?
The view that there is still an upside left in gold is fairly common. Says Ajay Mitra, managing director (Middle East and India), World Gold Council: “No one knows where it will reach, but in the short to medium term, we will see a surge in gold.”
The reason for this confidence in gold is the global crisis of confidence in capitalism in general and the search for a store of value since the usual store-of-value currencies, such as dollar and euro, look unsteady. When there is a fire, smart money moves to gold.
Agrees Sanjiv Shah, executive director, Benchmark Asset Management Co. Pvt. Ltd, who runs a gold exchange-traded fund (ETF) called Gold BeES: “Due to the global economic crisis and inflationary issues, there is a lot of asset reallocation happening and due to (the fact that) gold (is a) natural hedge against inflation, and (there’s) inherent demand for gold, I am pretty bullish on gold. I believe gold is a good bet for the long term.”
If the global crisis of confidence is shoving assets towards gold, the fear of inflation in the future due to the printing presses in the US working overtime spitting out dollars, is the other.
Gold, with its attribute of being a good hedge against inflation, is again the asset of choice. How long will this ride last? Answers Surya Bhatia, financial planner and principal consultant, Asset Managers: “Gold prices will remain high till the global markets are choppy and volatile. However, if markets stabilize, gold would go cold.”
Should you buy?
The decision around gold is really a market timing decision. Historically, such returns are abnormal. Once the world returns to order, gold may lose some shine.
What we hear experts saying is: There is an upside left in gold for at least 60 to 90 days. Those who are able to take the risk and do not mind putting a part of their portfolio at risk can invest in the metal for short-term gains. But the invest-and-forget investor needs to be much more careful.
For retail investors, the advice comes from Ashish Nigam, head (fixed income), Religare Asset Management Co. Ltd. He says: “No one can time the market. It is not advisable to buy gold for speculative purpose. However, for investments, one should go for a long-term staggered and disciplined approach.”
A disciplined approach is when you buy gold in the form of a systemic investment plan (SIP) through gold ETFs instead of buying physical gold in the form of jewellery or gold bars. Even financial planners insist that a long-term staggered approach works best and that gold needs to constitute around 5-10% of your overall portfolio.
Should you hold or sell?
So you bought gold a couple of years back and are now wondering whether to realize the profit at least on a part of your holdings. The answer to this would depend on why you bought the gold. For those who bought looking for quick profit, staggered selling, beginning now, may work.
Ranjit Dani, a partner with Nagpur-based financial planning firm Think Consultants, advises such investors to book profits: “If you bought at a price of Rs12,000 around three years back and want to sell at Rs18,000 to book a small profit, now is the time.”
For those who bought gold as an asset allocation strategy, your allocation would have got skewed due to the rise in gold prices. You need to sell gold now to come back to the 5-10% level of gold allocation in your portfolio. Portfolio rebalancing is the best way to book profits when the markets are riding high, while staying the steady course of a financial planning strategy.
Says Suresh Sadagopan, a certified financial planner with Mumbai-based Ladder 7 Financial Advisory: “In the long term, I think gold will not go down at all. So, if you have already invested in gold, looking at the uncertainty all around, gold is a safe haven. I would say, one can decently stay invested for five to seven years.”
Mint Money take
Short-term investors, go for it. Long-term investors, who bought gold as part of an asset allocation strategy, rebalance your portfolio, which would mean sell some gold to come back to your chosen allocation. Rebalancing is the best way to book profits while staying the course.
Ashwin Ramarathinam contributed to this story.
Graphic by Yogesh Kumar/Mint
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First Published: Tue, Jun 01 2010. 07 42 PM IST