We are living in the world where fashion trends change very fast. However, there are a few things which remain immune to any change in fashion. Similarly, in the world of investing, no matter how quickly preference of investors change, certain tenets remain unshakable and unquestionable. One of them is importance of asset allocation.

It has been found that investors are losing interest in gold of late. It is evident from the outflows from gold Exchange Traded Funds (ETFs) which have mounted to nearly Rs 1,250 crore in last 1 year.
 

Holding trends in Gold ETFs...

Data as on June 23, 2015
(Source: AMFI, PersonalFN Research)  

The decrease in AUM has come on account of two factors. One, decline in gold prices and the other is lower buying interest internationally.

Why are investors losing interest in gold?
There are growing speculations that Federal Reserves (Fed) in the U.S. may hike interest rates from the current level sooner or later. In anticipation of a rate hike by the Fed, commodities traders have been betting on a fall in gold prices. Gold prices are down nearly 5.0% over last one year which has made investors believe that momentum in gold is lost.

When real interest rates in the U.S. become negative, investors pounce on gold as it is considered as a store of value. This is why, when Fed slashed interest rates and announced financial stimulus packages in the aftermath of global financial crisis, gold rallied sharply. Now that Fed is set to hike rates, traders have been shorting gold looking to make money, as price falls. This speculation over the interest rate scenario in the U.S. has also made USD stronger against the basket of other major currencies of the world. As you may be aware, there is an inverse relation between USD and gold prices. So, whenever dollar strengthens, gold loses sheen and the opposite holds true as well.

As far as gold prices in India are concerned they have found some support due to weakness in Indian Rupee (INR) which has depreciated against USD by about 5.5% over last 1 year.

Outlook for gold and your investment strategy:
Global events such as deadlock of sovereign debt pile of Greece and tensions in Middle East may provide some prop to gold prices. But gold would largely pave its path gauging the strength of USD. As far as gold prices in India are concerned, domestic demand, international price trends and strength of INR against USD would be the factors to watch out for.

PersonalFN is of the view that, investors should avoid speculative approach and diversify across asset classes. The importance of diversification shouldn’t be undermined as it may help you optimise returns for the risk taken.

PersonalFN believes one should view gold as a monetary asset rather than mere commodity as it carries a store of value in times of uncertainties. In times when uncertainty yet prevails amid the period of risk-on, it is important that you be a smart investor and allocate some portion of your investible surplus in gold. This may help you hedge your portfolio. PersonalFN suggests you allocate 10%-15% of your total portfolio in gold via gold ETF. Remember gold is not an instrument to make quick buck, but a solid long term asset. Hence, you should ideally invest in gold with a longer investment horizon.

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