Spot gold prices have topped the ₹50,000 level on the Multi Commodity Exchange of India Ltd (MCX) as uncertainties persist with rising covid-19 cases. The prices of the yellow metal have spiked around 28% this year in rupee terms. Investors who missed out on the rally might be looking to invest in gold now, while existing investors might be thinking of increasing their allocation in the hope that prices may go up further. But should you increase your allocation to the asset class after the recent price surge?
Renu Yadav asked experts how much they are asking their clients to hold in gold now and why
CEO and principal adviser, Finzscholarz Wealth Managers
You can raise investment, but to about 10% of your portfolio
The yellow metal has seen a good rally in the past one year after a lull of over six years. Portfolios that had gold got rewarded. It also kept the overall portfolio stable in spite of the equity crash.
Since the past three months, we are recommending a higher allocation in gold for the coming few years. We normally suggest investors to hold 5% of their assets in gold. Now we are suggesting at least an additional 5% allocation. The reasons are multifold. Gold is at the right stage for a bull run. All central bankers will resort to printing money at different times. Increased money supply can fuel inflation and appreciation of real assets. While real estate is still struggling with legacy problems, we can see gold rising in rupee terms. Rupee depreciation will also get reflected in gold prices.
We recommend Sovereign Gold Bonds if the holding period can be eight years. If liquidity is an issue, consider gold exchange-traded funds (ETFs).
Managing director and CEO, International Money Matters
Maintain high gold allocation only till covid period lasts
Gold had hit an all-time high of $1,900 per ounce in mid-2012. In rupee terms, the returns were 5% per annum in eight years. After that gold fell around 45% between August 2012 and December 2016. Before rushing to buy gold, investors should understand that in the long-run, gold has delivered returns slightly above inflation, while in the short term, prices can be volatile.
There are three factors that drive gold prices in India: prices per ounce in US dollars, exchange rate movements between the dollar and the rupee and demand for gold. Returns will be affected by these factors as well.
Gold as an asset class should be part of all portfolios. Normally, we recommend 5-7% of one’s net-worth in gold, which we increased to 7-10% in March. Once uncertainties end, we will bring down the allocation to normal levels and sell gold holdings of our clients. Since the purpose is asset allocation, incidental benefits could be returns
Co-founder and chief investment strategist, JRL Money
Time to book profits from tactical gold investment
Gold has stood the test of time and no one knows this better than Indians, particularly women. In the last 100 years, gold has delivered close to 8% compounding returns in rupee terms. But what should one do in the current market conditions? Should one be selling, adding, accumulating or doing nothing?
Gold should be a part of investors’ portfolios and in the Indian context, 10% of total wealth can be in it, normally. This can be increased to 15% to 20% tactically. But that should only be done when returns are in the negative.
We have asked our investors to reduce the tactical part and move that into financial assets. This is not a view on gold as an asset category but simple logic is to take money out when an asset category performs well and feed into an asset which is showing negative returns. Gold, government securities and PSU bonds are a consensus trade now. One rarely makes money following the crowd.
Short-term returns should not tempt you to buy more
We have always maintained that investors should look at gold for asset allocation. Gold can form 10-15% of an the portfolio depending on the comfort of investors.
Gold is a preferred investment option during uncertain times and acts as a good hedge in case the stock markets go through difficult times. This is why gold prices have been increasing since the time the spread of the covid-19 infection started.
The continuous rise in gold prices has attracted the attention of a lot of investors.
Despite rising prices, the key is to maintain a 10-15% allocation towards gold, because the yellow metal has the tendency to remain range-bound for a long time and the returns have been marginally higher than inflation.
We do not suggest investors to buy gold merely by looking at short-term returns. Having gold beyond the suggested allocation can prove counterproductive.