The importance of gold in an individual's portfolio cannot be overstated. And given the recent rise in the price of this yellow metal there is increased interest in this market should one sell into strength or buy and wait for further strengthening.
A lot of reasons have been put forward explaining why an investor must have exposure to gold. One of the most important reasons is that gold acts as a hedge against inflation, a situation where the value of currency is eroding. This characteristic of gold exists because the price of gold is impacted by factors that are usually distinct from factors affecting other more popular instruments like bonds.
And this is one factor that is driving the interest in gold today. The price of gold has gone up by over 30% over the last twelve months or so owing to concerns of instability in the global markets (be it due to terror attacks, higher crude prices, war). This shift in flow of investible funds reflects a flight to safety to assets whose value will not be impacted adversely by inflation, war and terror attacks. Gold comes on top of the list.
Gold must have a place in every portfolio and there are several reasons for the same. Our Asset Allocator recommends that 5% of an individual's assets should be in gold.
However, deciding to own an asset is only one part of the overall process. The other part is to execute the decision i.e. buy gold. And this is where timing becomes very important.
To underscore the importance of timing, let's look at what gold has done over the years.
Today, gold trades at about US$ 362 per oz. If you invested in December 2001 at about US$ 276 per oz you have already made a lot of money on your investment and probably you are booking a part of your gains. However, if you are an investor in gold since 1980, when average prices were in excess of US$ 600 per oz, you are still sitting on huge losses! The point we are making is that although the gold as an asset is an important part of your portfolio, it is equally important to buy it at a price which leaves scope for future appreciation in value.
There seems to be a band in which gold has been trading since the heady days of 1980s. The graph above shows that gold is about 10% off from its 10 year peak and about 25% off its 20 year high. Where the price of gold will go from here is anybody's call.
For those keen on investing in gold at these price levels, it will help to have a more reasonable expectation of returns going forward.
PersonalFN provides research recommendations to its premium research subscribers and financial planning clients. To know the recommendation on this investment, become a subscriber or client today. Click here to know about our research services. or Click here to know about our financial planning services. Or, simply write to info@personalfn.com. You can also call us at +91 22 6136 1200.
Add Comments