‘Gold to see volatility, but long-term trend is bullish’4 min read . Updated: 22 Oct 2020, 08:55 PM IST
Experts advise keeping only 10-15% gold in portfolio as higher allocation may hit returns
Gold has delivered a return of around 29% in rupee terms in 2020. This has led to many investors putting money in gold and related instruments. Gold exchange traded funds (ETFs) and gold funds offered by mutual funds have seen a record net inflow of ₹6,000 crore (April to September), while sovereign gold bonds have garnered around ₹11,000 crore from seven issues since April 2020. Globally, gold ETFs and similar products have seen a net inflow of 1,003 tonnes worth $56 billion in 2020, as per data from World Gold Council.
Despite this bullish trend, one question that is bothering investors is that whether this rally will sustain or not? Gold prices have corrected around 9% from their peak in August when they touched a high of ₹55,000 per 10 grams. Currently, gold is hovering around the ₹51,000 level, while it is around $1,900 per ounce in the international markets. With festive and marriage season coming up, many people are wondering whether they should buy gold now or wait for some more correction.
Speaking at the Mint Money Conversation, presented by digibank by DBS, on 21 October, experts highlighted that factors driving gold are positive and the bullish trend is likely to continue at least for the next two-three years.
“Real interest rates, which are one of the biggest drivers of gold, are moving further lower or into the negative territory, as various governments, including the US, have cut rates to support economic growth. They are likely to stay lower as even post 2008 crisis rates remained zero-bound for next six years in the US," said Chirag Mehta, senior fund manager-alternative investments, Quantum AMC.
“There will be a shift from safe fixed income instruments towards instruments such as gold that tend to preserve purchasing power. This is going to be a big driver of gold going forward," added Mehta.
The current rally in gold started in July last year, but Somasundaram PR, managing director, India, World Gold Council believes that there is more steam left, especially when compared with how gold performed during the financial crisis of 2008. “Gold more than doubled from $900 in early 2008, and three years down the line, we saw it peaking at $1,900. It took three years to double, and compared with that, we have seen 30% rise since the pandemic set in. Even if we apply dollar inflation to 1980 price of gold, it should be $2,800, while we are right now nowhere close to that. Even if we look at the 2011 price, which was one of the peaks, and apply inflation, prices are still lower. So, these data points tell us that there is still some scope for gold prices to go up in the next few years," he added.
He, however, believes that investors should be ready to see some volatility, but doesn’t see any change in the structural factors that can bring down gold prices.
Why gold is important
One of the most successful investors, Warren Buffett, who has been critical of gold investing, recently invested in a gold mining company through Berkshire Hathaway Inc, a move that has surprised many. But this shows that one can’t ignore gold and its rising importance. Therefore, even for retail investors it is good to have gold in their portfolios to provide diversification.
“Gold is the third leg of the stool, which is very essential to bring stability to a portfolio. Most of the times when other assets, especially risky assets like equity, haven’t done well, gold has done well. It’s proven that it helps you minimize losses. A study showed that gold added to the tune of 10-15% over the long term not only augments returns but also reduces risk. Beyond 15%, it reduces your risk, but it also lowers your returns. Therefore, 15% is an optimal level, as it reduces risk and optimizes returns," said Mehta.
Echoing similar views, Gaurav Rastogi, founder and CEO, Kuvera.in said: “Retail investor, whose risk-taking capability is much lower than a high net-worth individual, should have up to 15% allocation to gold, as it limits downside when other asset classes, like equity, are not doing well. It helps balancing the risk of a portfolio."
However, experts also believe that investors need to be realistic with return expectations. “Over the past 20 years, the three-year rolling return—if you would have invested in gold on any particular day—was 12% per annum in rupee terms and 10% in dollar terms. So that’s the mean return for a three-year holding period. If investors’ expectations are derived from the last one-year performance, then we discourage them," said Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management.
Investing in gold is a wise decision, but don’t go overboard. There are a variety of products available in the market, including gold ETFs, sovereign gold bonds as well as digital gold to choose from that may suit your requirement.