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Wednesday, October 29, 2014

Why you should include gold in your investment portfolio – a guest post

For most Indians, buying gold is a no-brainer. Gold is bought for the family deity. It is bought for a daughter’s wedding and for the wife on a wedding anniversary. It is bought on Dhanteras, and on Diwali. Having significant amounts of gold in one’s possession is a sign of great wealth and status.

But is gold a good investment? Sure, the price of gold has appreciated over the years. But it doesn’t provide any regular returns. Equity shares provide dividends, rights and bonus shares. Plus, they can be redeemed quickly for cash. Redeeming gold for cash is cumbersome – though many NBFCs now offer easy gold loans.

The debate should not be about equity vs. gold. Logically, equity is far better as an inflation-beating investment. However, that does not mean one should not include gold as part of an asset allocation plan. In this month’s guest post, Nishit builds the case for including a small percentage allocation for gold as a hedge against inflation.

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Gold’s price is back where it was in July 2010 in US Dollar terms (at about 1200-1250). In July 2010, the Indian Rupee was about Rs 47 to the US Dollar and now it is around Rs 61.

While investment focus should be on equities, it is always better to have 5-10% in Gold as a hedge against inflation. People talk about Rupee going back to 47 levels but that will make exports uncompetitive and it remains to be seen if Rupee actually appreciates that much.

Historically, Rupee has always depreciated against the Dollar. With global markets showing signs of weakness, Gold can also be a hedge against equity weakness if any. While I do not believe that the Indian markets will have a drastic fall, it is always good to have a hedge.

Interest rates also show signs of weakening and Gilts are another good option at the current juncture. Gilt funds make money when interest rates drop. With weak diesel prices, inflationary pressure will lessen.

Investment in Gold can be in the form of Exchange Traded funds, physical gold or even jewellery (if one wishes to enjoy the gold while using it as a hedge). There are talks of import duty being cut on Gold in the forthcoming budget.

Asset allocation at the current juncture can be 90% Equity, 5% Gold and 5% Gilt funds. When gold was at its peak at almost US $1900, the risk-reward ratio was unfavourable for buying any gold. Now, it has corrected almost 33% from the top and almost 55% of the rise which started in 2008.

In US Dollar terms gold can correct another 10% or so. One cannot catch exact levels but it is safe to start accumulating gold.

The promise of “Acche Din” is here and I see no reason why India will not see glory days ahead, but it is always good to buy insurance for a rainy day.

If interest rates go up for some reason, or if the global economy weakens further for some reason, equity and Gilt funds will go for a toss. At least gold will cover up some of the losses.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

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