Gold in your portfolio

Gold since ages has been of prime importance for Indians, not as an investment but from an emotional perspective. This emotional value has made Indians the biggest buyers of gold. Out of the total gold produced globally 60% is consumed for jwellery and Indian's are the biggest buyers for this jewellery. But from the last couple of years Gold has emerged as a major investment alternative for many. People call it as hedge against inflation. Investment Managers advise clients to invest 5% - 10% of their total portfolio value in Gold. For some HNI's this value might go higher.

Gold typically has never been the best of an asset class. Although it holds prime importance culturally and economically since many year the last 100 year return of gold has just been 3.78%. A summary of gold returns is as below:



Gold Returns* (yoy)



Gold Price Movement* (1900 - 2010)

 A look at the above table clearly suggests that returns from gold have spiked in the last 10 years. The price movement of gold makes me think how long will this gold frenzy last. Before 2010 the last spike in gold was in year 1980 when it touched the $600 / oz mark. After this for consistently 29 years it traded below this spike. This means anybody who purchased gold at that time was sitting on negative returns till 2009 when gold crossed its previous peak. Leaving the last 10 years aside data clearly suggests that Equities and Bank FD's have been much better asset classes historically. People call gold as an hedge against inflation. Barring last 10 years it becomes difficult for me to agree with this statement.

The only advantage with gold has been that its value has been protected during times of scams. So when equities crashed during 1970's or 2008 scams gold held on to its value which gave people confidence in this asset class. Gold also holds prominence from an economic perspective as Government treasuries store gold as backup for any crisis.

Traditionally people had to purchase gold physically either through Banks in the form of Bars or through jewellers. However Gold ETF (exchange traded funds) and Gold funds have flourished the market in the last few years. They have become a very convenient option for investors to invest amidst soaring gold prices. One might have an allocation to gold with a small investment of Rs. 5000 without any hassels of storage as the investment is held in paper form.
Investment advisors across the board are recomending a 5% to 10% investment in gold. The returns quoted are that of last 10 years and gold is projected as an attractive investment option to boost the portfolio returns. I personally agree with the diversification in gold upto 10%. Anything greater than that looks at little uncomfortable. The global situation has been grim since 2008. Despite the recession getting over many developed nations have still not overcome their problems. US is struggling with deficit, many European countries like Spain, Greece, Ireland etc are already facing defaults on thier debts. China is battling with inflation problems and is hiking its interest rates. Similar problem exists in India. Gold as we discussed above is known to hold its value during crisis situations. This proves to be true in the current globally grim scenario. Till the time the world economy comes back on track Gold seems to be a good investment option. The upward swing in Gold prices is likely to continue for a short tenure post which we might see a stagnation or a correction. Lets not look for a very long horizon of 10 yrs or more from Gold as historically the stagnation of gold has been for a longer tenure than the rise. The moment world economy starts getting back on track I personally feel investors will have better options to place their money.



*www.gold.org  (World Gold Council: Prices considered from year 1900 to year 2010)