Gold ended the 2003 at just over US$ 400 per ounce. It crossed the US$ 400 mark for the first time since February 1996, a good eight years ago. Expectations are running high and the number of investors bullish on gold has grown dramatically over the last one year. But, is gold a buy today?

The graph above brings out a very interesting fact. The rally in the price of gold is largely due to the fact that the value of the US Dollar has been declining in recent months. This is underscored by the fact that if one were to look at the price of gold in Euro terms, there has been little gain! Notes Ajit Dayal, a well recognised analyst and fund manager, who had been advising people invest in gold about two  three years back at US$ 280, gold has moved up in US$ terms, but if you look at gold in Euro terms it has risen barely 3% per annum over the past 3 years.

We put the question whether gold is still a lucrative investment option (one  three year time frame) to Dr. Marc Faber, a noted investment manager (who has been bullish on gold for several years now) and author of The Great Money Illusion  The Confusion of the Confusions. His view - I think that gold may come under some more profit taking, as a dollar rebound may be unfolding. In other words, gold prices may decline.

This may not come as good news to many of us who had almost got used the idea that gold prices will rise further from here on.

Ajit, too seems to have changed his view on the asset. His take on the price of gold  gold prices will be a function of strong US$ or weak US$, if the US$ falls further, gold will rise in US$ terms: if the US$ rises and reverses its recent losses, then gold will probably fall in US$ terms. My personal view is that the US$ will strengthen over the next few years, the fall of the US$ is behind us. In effect, Ajit supports the view that gold may weaken in future.

And what about gold as an investment avenue on a time frame greater than 3 years? Dr. Faber is in favour of gold as Gold is the only currency whose supply cannot be increased by an irresponsible government, whose sole purpose is to get reelected in order to continue to rob hard working people and abuse its power.

Ajit on the other hand is not a big supporter of gold. In his view many people believe that central banks around the world are printing money and encouraging inflationary trends: maybe they are, but their job is not only price stability but also job creation and movement in the economy; when a business cycle is negative - as it has been until recently - it is the role of the central banks to create liquidity, cheap money, and get the economy to move again. They have achieved that. At a point in the cycle, they will raise interest rates and suck the excess liquidity out of the system; gold should not be a major portion of any portfolio.

The final question we put to these experts, was whether there is any reason for people to invest or not invest in gold today.

Dr. Faber suggests maybe other hard assets will perform better, such as real estate in Asia, sugar, coffee and orange juice. So although he continues to be a long term supporter, currently, he prefers other hard assets.

Ajit, as it comes out from his following response, is not much of a believer in gold as an investment avenue  gold is, in many instances, a useless asset for most people with all the risks of any investment; buy some gold for your wife to wear or for your kids to wear one day, but not more than that; in the Indian context the nucleus family is breaking up, if you have spare money, buy a property for your children which they can use one day or pay up the loans on your own home and make it yours, free of any loans.

So what should you do now?

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.

If you are over weight on gold, it may be time to get your asset allocation in line. And if you are yet to reach your portfolio limit for gold, maybe you should wait for a while till gold prices correct before buying some more.

1 US$ = Rs 45.25

* Mr. Ajit Dayal is the co-founder and Chairman of Quantum Information Services Ltd., founder of Quantum Advisors Pvt. Ltd. and is the Deputy Chief Investment Officer of Hansberger Global Investors, Inc. The views expressed by Ajit Dayal are his personal views.

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