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Business News/ Markets / Gold may constitute roughly 5% of new investors' portfolio, says Dr Joseph Thomas of Emkay Wealth
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Gold may constitute roughly 5% of new investors' portfolio, says Dr Joseph Thomas of Emkay Wealth

In an interview with MintGenie, Thomas spoke extensively about gold as an asset class, trends in gold exchange-traded funds (ETFs), and factors that could dent the advance of gold.

Dr Joseph Thomas, Head - Research, Emkay WealthPremium
Dr Joseph Thomas, Head - Research, Emkay Wealth

A new investor must build portfolios that are diversified across asset classes, including equities, debt, and gold, and that are in line with their risk profile, according to Dr. Joseph Thomas, Head - Research, Emkay Wealth. Even though there has been some market correction in the value of equities in both domestic and international markets, this is still a very strong year to build portfolios, he believes.

In an interview with MintGenie, Thomas spoke extensively about gold as an asset class, trends in gold exchange-traded funds (ETFs), and factors that could dent the advance of gold.

Edited Excerpts:

1. In FY24, do you anticipate gold to beat equity markets, as we see an upsurge in gold on the back of concerns over recessions?

Gold has not been able to beat equities consistently year after year. This is because of the inherent difference in the nature of the asset class and the purpose for which the investments are held. Usually, the performance of gold has been good in a couple years in a set of five to ten years. 

These bouts of performance need to be captured through tactical allocations in the overall portfolio. The uncertainties around the banking system in the US and Europe, the likelihood of inflationary conditions etc. have given an edge to gold for sometime because gold is considered a safe haven in such times. 

This is exactly what has attracted funds into gold ETFs, in the past two to three weeks. While the banking related issues may not spread far and wide, and seem to be contained at present, the likelihood of at least a mild recession is very high at this juncture and this factor is going to give a boost to gold prices.

Many forecasts put the gold target prices somewhere between US$ 2300 and US$ 2500. This is closely intertwined with the probability of recessionary conditions, and any aggravation of such conditions, which is less likely and as things stand at present, gold could move higher still. Therefore, a tactical allocation to gold could be considered. 

However, a word of caution here – the current rally had its base at US$ 1680- US$ 1720 levels, and therefore, a significant part of the upward movement has already happened. Last time after moving up towards the US$ 2000 level, gold prices tested the US$1830 and US$ 1860 levels more than once before it started the upward movement again. Therefore, at these levels, technically, there is good support for gold prices.

2. How should a new investor perceive gold as an investment, and how does one go about making a gold investment?

For a new investor, gold as a part of the overall portfolio may be about 5% of the portfolio. This is as per the traditional asset allocation models. Since gold does not provide any intervening cash flows like in fixed income, or any inflation-beating returns over the long run like equities, it is held mainly as a hedge against inflation. Investments may be made through gold funds or gold ETFs.

More attractive avenue path would be to acquire Gold Sovereign Bonds. These bonds carry an annual coupon of 2.50%, while retaining the opportunity to realise capital gains after eight years, which is the maturity period of gold bonds. Most of the deposits of gold from the mines are already exploited and there is very little of fresh supplies from mines expected. This may give some upside potential for gold.

But the significant risks to gold prices is two fold - one, a much prolonged hard money policy from the central banks as against the present expectation of a moderation coming up soon in policy stance. And, two, the recession is short lived and the economies revive their momentum faster than expected. These two factors could dent the advance of gold.

3. Amid lower gold prices, gold ETF outflows continued in February. Do you anticipate that the trend in the gold ETF has reversed for March, given that gold prices have recently reached an all-time high?

In the last fortnight, the Standard & Poor's Depository Receipt (SPDR) gold shares saw an inflow to the tune of US$ 1 billion. But this is not a big inflow as such. Irrespective of inflows, the fortunes of gold would be dependent on the fortunes of the US Dollar. The movements in the Dollar Index are critical as any rise in the Dollar Index will lead to a fall in gold prices and vice versa. 

The strength of the Dollar, and therefore, of Index would be function of asset movements either into or out of dollar denominated assets. These asset movements determine currency movements. This is something that needs to be watched closely for the prices of all commodities including gold.

4. Compared to gold ETF, the market for gold bars and coins has been robust. What are the main drivers of this pattern?

Gold ETF is mainly a part of institutional demand for gold whereas the demand for bars and coins is mainly a part of retail gold demand. It may be mentioned here that there is a trend of investing in gold that is emerging which is moving away from physical gold. This trend may accelerate. The retail demand that emanates mainly from India and China are linked to festivals and occasions which require some gold, which bids up demand for ornaments and coins. 

The retail demand is almost always consistent and it is the wholesale demand which is often driving up the demand in larger volumes. Central banks, for example, are the largest investors and they may take their calls at critical levels from time to time.

5. What advice do you have for new investors in 2023?

New investors should build portfolios in line with their risk profile, and diversified across asset classes including equity, debt and gold. There should be fair amount of diversification into sub-asset classes too. This is a very good year to build portfolios having seen some amount of correction in equities both in the domestic markets and overseas market. And market yields are high levels owing to the tight money policy by central banks. The short end rates at their highest levels in a while as the yield curve is inverted.

 

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Gold has performed well over the past 3, 5, 10 and 20 years, despite the strong performance of risk assets.
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Gold has performed well over the past 3, 5, 10 and 20 years, despite the strong performance of risk assets.

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Published: 13 Apr 2023, 09:18 AM IST
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