Equity and gold are two fantastic asset classes, which do can wonders to your portfolio. Equity on one hand enables to create wealth over the long-term and also hedges inflation, while gold acts like insurance, during economic turmoil and turbulent times of the equity markets - thus having a tendency of becoming bold.

 

In the year 2007 when the global economy was booming, the Indian equity markets (BSE Sensex) too showed an uptrend, and gold typically hovered in the range of 10,000 - 11,000 thus indicating resistance from moving up. It also displayed a negative correlation between the two asset classes – equity and gold. And this negative correlation was also seen during turbulent global economic events such as U.S. Subprime mortgage crisis (in January 2008), Lehman Brothers bankruptcy (in September 2008) and Euro zone debt crisis (in April 2010); where equity showed a downtrend, but gold became bold by showing an uptrend.

 

But nonetheless the Indian equity markets sailed the jitters of the global economic turmoil well, due to its inward looking nature and strong domestic consumption. And interestingly despite the uptrend in Indian equities, gold has continued to become bold, thus now showing signs of positive correlation between equity and gold.

 

Note: Gold Prices taken of MCX Spot Mkt.
Data as on September 22, 2010
Base: 10,000
(Source: ACE MF)

 

So, if one were to invest in India in the respective asset classes (Equity and Gold) 10,000 on January 2, 2010, his investments in Indian equity (BSE Sensex) would have been worth 11,418, while in gold it would have been worth 11,432 – both appreciating by14.18% and 14.32% respectively. However the same investment amount in U.S. equity (Dow Jones) would have appreciated to 10,298 – merely yielding 2.98%.

 

So, now you may be wondering - why such a positive relation between Indian equity and gold? Well, that is because of the following reasons:

 

• Global economic turmoil : Despite the fact the equity markets across the world have rallied since March 2009 (the bottom of the BSE Sensex), backed by the global economic recovery; the fear of double-dip recession still continues because the U.S. unemployment data along with Consumer Confidence Index number, have an unappealing picture to show.
  
  Hence as the global economy is revealing a gloomy picture, the foreigners (FIIs) are betting on the India story, but at the same time being cautious about the health of the global economy they are investing in the safe haven – gold.


• Weak U.S. dollar : As the U.S. economic data (unemployment and consumer confidence index) is still depicting turbulence, the U.S. dollar has weakened thus making the precious yellow metal look bold. Moreover as the U.S. dollar has weakened, the FIIs are taking fresh positions in Indian equity also taking advantage of the strong Indian rupee.


• Inflation : Our domestic economy is also exposed to severe inflationary pressures. Despite the fact WPI (Wholesale Price Index) inflation for August has mellowed to 8.51% from 9.97% in July 2010, driven by the new series (with year 2004-05 as the base year) and fading of base year effect; the same headline inflation if calculated on the earlier series (with year 1993-94 as the base year), has shown a marginal fall to 9.50% from 9.97% in July 2010. Moreover, food inflation is also surging (15.46% for the week ended September 11, 2010).
  
  Hence, as long as people use the precious metal to hedge against inflation, this precious metal will continue to shine, along with investors betting on equity to hedge inflation.


• Low real interest rates : As long as real interest rates in the economy are remain low, more people will exude confidence in equity and gold, which will take their prices to new highs.


• Domestic demand : Peculiarly in India, during the festive season the demand for both these asset classes, especially the precious metal looks robust, which again gives a fillip to the prices of the respective assets.

 

Now taking into account that all the above factors still prevail in this global economic recovery, in our opinion it would be wise to invest further more in this precious yellow metal. One may continue to invest 5% - 10% of the total investible amount in gold, by keeping a time horizon of 10 to 20 years. Remember whether a negative or a positive correlation, this asset class will do well to your portfolio – it will act as wealth protector, wealth creator and an insurance during economic uncertainties.

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Comments
sneghane@bk.ru Jan 19, 2012 Wow, your post makes mine look feeble. More power to you!
marketing@personalfn.com Mar 25, 2011 Agreed with Sachin. Gold has been historically considered as an important asset class mainly for three reasons: Hedge against inflation Adds stability to the investment portfolio Asset Allocation avenue Even though Gold Saving Funds are passively managed, the most wonderful thing about them is that, they provide you the opportunity to invest in gold without really having to worry much about how to store it physically, since the units (your holdings in gold) are allotted in a paper form. Moreover, such a fund also provide you with the convenience of a Systematic Investment Plan (SIP) as well as lump sum investments, but without having you to open a demat account to avail its benefits (which is unlike Gold ETFs). Some Useful Read in this regards for all our readers : Cover that extra mile before investing in Gold Funds Take a Golden Sip: Kotak Gold Fund Thanks

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