Wealthy Wednesdays: Is investing in gold a good decision?

Wednesday, 9 July 2014 - 8:50pm IST | Place: Mumbai | Agency: DNA
Nirmal Rewaria, Head Financial Planning, Edelweiss shares helps you decide

­Is this is a ‘golden’ opportunity?
There is so much media glare on equities that investors have little opportunity to evaluate other options. The perceptive investor however, does not focusing on the media. He wants to know if there is any opportunity out there that he may be overlooking; perhaps an opportunity in gold? It is normal for investors to think a little contrarian at this stage. Everyone is talking of equities hence they are looking for something other than equities that has not quite shot up to the same extent. Enter gold.

Why gold?
It is important to first understand what gold brings to the portfolio. This will help us assess whether gold is a good investment in these times and if not now, then when does gold make for a lucrative investment?

Most investors think of gold as an investment, which it is of course, by virtue of the fact that investors are putting their money in gold. These investors think of gold as an investment / asset that will earn a return over the long term. In this sense, they think of gold like any other asset be it equities, property, fixed deposit and so on.

The more perceptible investors think of gold as insurance. They buy a little gold to insulate the portfolio against shocks – be it from politics or economic downturn or a global catastrophe like the 2008 global credit crisis.

Why does gold makes for a good insurance bet?
Gold is unlike other assets in two ways–there is limited supply, which means that you cannot increase gold supply like you can increase the supply of equity shares or bonds. So gold prices do not fluctuate in the same way as bond prices or share prices. The second way gold is different is that it is an international asset and available to the Indian investor at the same price as the US investor (ignoring local factors like import controls and the like). This makes gold a solid asset with a price that is usually a good indicator of the intrinsic worth of the asset and this price is the same across the world.

Since gold is so good, why would investors ever want to own another asset? They should simply buy gold since it is the only ‘true blue’ asset at a price that is more intrinsically true than other assets.

That would be true if gold was the only asset in the world. But it is not. There are other assets to choose from– equities, fixed income, property even cash or liquid funds. And there are occasions when each of these assets has outperformed gold. If investors were to remain glued to gold, they would have lost out on these opportunities. Ultimately, every asset goes through a boom/bust cycle. The idea is to enter the asset at a low and sell at a high.

Why not gold?
Because gold acts as insurance in the portfolio, it is usually sought after by nervous investors when other assets are not expected to do well. So when equities and fixed income are no longer attractive due to economic woes for instance, gold enters the limelight.

Ditto for currency. So long as the US dollar was under pressure due to quantitative easing (QE), investors flocked to gold. Now that the Federal Reserve has indicated that it will phase out QE, investor confidence in the US dollar is restored at the expense of gold.

Over January 2014 to June 2014 gold has barely risen by 9%, of this nearly 7% appreciation came in June 2014 alone. Compare this to the blistering growth in equities–Indian indices of all hues are at all-time highs. As global economies rebound, investors no longer take shelter in gold; they want to capture economic growth through equities. So long as global economies are recovering strongly from post-2008 levels, equities will be the flavor at the expense of gold. Subdued gold demand will reflect in depressed gold prices.

So should you invest in gold today?
Gold should be treated as insurance and not as an asset. Gold is an asset for hedge funds and astute fund managers, who study global trends and invest in gold on cues. Retail investors must buy gold as insurance to insulate their portfolios from shocks in the equity and debt markets.

Gold should be about 5%-10% of the portfolio. Your financial planner is best planned to define the precise allocation based on your risk appetite and investment objectives.

 


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