Gold prices in the international market have rallied sharply from around $1050/oz to $1300/oz in a span of less than 4 months. That is a return of nearly 23%, making gold the best performing asset class. Incidentally, the rise in price of gold also coincides with the Akshaya Tritiya festival in India when it is considered auspicious to buy gold. The key question is whether it is once again time to buy gold from an investment perspective. There are 3 key factors you need to understand in this context.
It is not about negative rates but about gold as currency…
A common argument for buying gold has been that since interest rates in Europe and Japan are negative, gold makes a better investment bet. That is far from the truth. If investors want to avoid negative interest rates, they would avoid sovereign debt and switch to equities or probably even to sub-prime debt. Investors rarely ever buy gold to escape from negative interest rates. So what exactly is happening to gold prices?
It needs to be understood that gold is actually emerging as an alternative currency. Global investors like Stanley Druckenmiller have specifically spoken about the merits of gold as a currency. Remember, most leading central banks across the US, EU, Japan and China have gone on a currency printing spree. This has created a liquidity glut making these currencies worth much lesser. The problem with fiat currencies like the Dollar, Euro, Yen and the Yuan is that there are no limits on their supply. On the contrary, gold being a finite commodity has limited supply and hence it will never face the kind of troubles that fiat currencies will face.
Gold is now more than just a safe haven investment…
For many years, gold was the ultimate investment in times of global and political strife as well as during times of economic uncertainty. The biggest bull-run that gold saw was between 1971 and 1980. This period began with the demise of the Gold Standard and then the world was rocked with a series of cataclysmic events like the Yom Kippur War, Arab Embargo, Iran-Iraq war and the Russian invasion of Afghanistan. By the end of the decade, gold had rallied from $35/oz to $900/oz. The world has hardly seen safe-haven buying in gold after the 1980s.
The big trigger today for buying gold is that fiat currencies are lacking in discipline and are prone to create a highly inflationary environment. This is bad news for the value of the currency as well as for domestic purchasing power. Gold as a currency can help solve this problem. The best indicator of this gold demand is the change in AUM of global gold ETFs. The world’s largest gold ETF, SPDR, is already seeing a sharp increase in AUM and that is a reliable indication that among the institutional investors, gold is surely emerging as a veritable asset class.
Should gold replace your equity and debt allocation?
Actually, gold should be an add-on allocation to your portfolio. Equities in India will continue to be attractive for a variety of reasons. Firstly, the 7.5% GDP growth and the 100bps advantage over China will sustain the interest in India. Secondly, the stable rupee will ensure a steady flow of FII money as the dollar returns will be better protected in INR assets. Thirdly, India offers the best variety of mid-cap and small cap shares, which are actually benefiting from low oil prices and are likely to show the best returns visibility.
Debt will also continue to be attractive as inflation comes under control and the RBI continues its dovish rates policy. As rates go down most of the debt funds are likely to benefit from the capital appreciation. This will keep the attractiveness of debt high.
So, how and why will gold fit into your portfolio?
We like gold as an asset class for a variety of reasons. Firstly, with a stable rupee, the Indian gold price will be less prone to fluctuations of the dollar as far as gold is concerned. This was a problem when the rupee was losing value vis-a-vis the dollar. Secondly, gold has managed to beat inflation over the last 15 years and that by itself gives a good hedge to investors to put money in gold. Thirdly, more central banks are likely to shift a part of their reserves to gold and China has already shown the way. Greater central bank demand is likely to raise the demand for gold and it will be followed by ETF demand. Last, but not the least, it is possible to hold gold in India in a variety of forms like gold ETFs, gold bonds, gold coins etc. This offers a lot more flexibility to the investor to invest in gold today at a lower cost.
In a nutshell, gold must form a part of any investor’s portfolio at this point in time. As an inflation-hedge and source of stability, gold is likely to add a lot of value to your portfolio. Of course, you need to consult your financial advisor on the exact proportion of allocation.