InvestorQ : What are the justifications of including the gold in your portfolio?
Ria Jain made post

What are the justifications of including the gold in your portfolio?

Arti Chavan answered.
3 years ago

Gold has been the best hedge against global uncertainty. That has been a historical trend with gold. Between 1971 and 1980 when the world was racked by the Arab-Israel war, Oil embargo, Iran-Iraq war and Russia’s invasion of Afghanistan, the price of gold went by from $35/oz to $900/oz in a span of 10 years. Gold has typically been the only asset which holds value in times of global uncertainty. Much more recently, we did see the gold prices going up sharply during the financial crisis of 2007 and during the time when Lehman and Bear Sterns were going bankrupt, you would have been better off invested in gold as an asset class. With the crisis in oil, Middle East politics, Russia and in the South China Sea, gold may be a good idea as a safe haven. For example, if the trade war between the US and China deepens and the countries try to get into a currency war, then the value destruction could be immense. Both equities and debt could lose value as currencies go into a spin. In these circumstances, gold could be a good bet for you in turbulent times.

Continuing on our previous point, gold can be a very good investment option when it is easier to rely on gold as a currency. That is when central banks are following a very lenient policy with regard to note printing leading to consistent inflation and depletion in the value of the currencies. During the last 8 years since the crisis, central banks of the US, EU and Japan have printed their currencies overtime. This has led to many currencies losing value due to too much supply of currency. Under these circumstances, gold is a great investment as its supply is finite and nobody can go on minting gold. Hence it will also be valuable. In other words world currencies are losing value gold emerges as an alternate currency. That is a good investment case for gold. Of course, it is always better to maintain your exposure to gold at just about the 8-12% range and not get too aggressive on gold. It is after all a hedge investment and not a return generating investment.

Apart from jewellery, there are also other sources of demand that will drive the price of gold. Demand for gold comes various sources. For example, demand for gold comes from usage and storage. China and India continue to be two of the largest markets in the world in terms of jewellery demand. This is a kind of perpetual demand that will continue to drive gold prices. Storage demand comes from central banks and ETFs. Many central banks are buying more gold as they are unsure of holding too much of their reserves in dollars and euro. This storage demand will drive much of the demand for gold and take prices higher. In fact, it was just reported that year 2018 saw a 50-year record in terms of gold purchase by central banks. In addition, investment demand from gold ETFs also props up gold demand. There is also a medical application for gold purchases but that is very small to be really material.