InvestorQ : Why should I have gold in my portfolio and what are some of the unique aspects of holding gold in the portfolio?
Aashna Tripathi made post

Why should I have gold in my portfolio and what are some of the unique aspects of holding gold in the portfolio?

Tisha Malhotra answered.
2 years ago

To understand why to hold gold in your portfolio, you need to understand the unique aspects that drive the demand for gold. Nearly 70% of the gold demand comes from jewellery, aesthetics, gifts and gold coin purchases. The balance is accounted for by ETF buying, central bank buying and a very small portion of demand arise from industrial applications. Here is what you need to know before taking a call on gold.

· The difference between global gold and Indian gold prices is largely due to the weakening of the rupee. Since gold prices are globally denominated in US dollars, any weakening of the dollar increases the rupee gold price. Between 2011 and 2019, the rupee has weakened from 48/$ to 72/$ and this 50% rupee weakening explains why rupee gold is at a high while dollar gold is still below its peak.

· Indian households possess gold to the tune of 22,500 tonnes. We are only talking about households and are not even counting the gold in the temples; which could another humongous sum. Can you imagine the value of this household gold? For example, 22,500 tons of gold translates into 22.50 billion grams of gold. Considering that the Indian price is currently Rs.4,000/gram that translates into gold holding value of $1.25 trillion. Since gold has appreciated by 30% in the last one year, it has resulted in gold wealth creation to the tune of $260 billion in the last one year. Most people ignore this wealth creation in the asset class.

· Gold has been the preferred choice in times of uncertainty due to safe haven characteristics. Today, global uncertainty is elevated due to a number of factors like the trade war, BREXIT disruption, China slowdown, currency wars; risk-off investing, Coronavirus etc. In these conditions, gold emerges as the best bet. In fact, if you look back in the last 50 years; between 1971 and 1979, gold prices rallied 25-fold on the back of global uncertainty. That is why gold becomes essential.

· How much to allocate to gold; is the real million dollar question? Ideally, gold should be a part of every long term investment portfolio in the range of 10-15%. Gold provides a solid hedge in uncertain times. In times like these, it makes sense to push the allocation closer to 15%.

One factor you need to consider while allocating to gold is the now-famous Gold/Silver ratio. The gold/silver ratio is an important input and that is close to its historical high of 80X. In 2011, that ratio had fallen to below 50X. Buying gold closer to 80X is empirically risky and that is what you need to be cautious about. Adopt a phased approach to buying gold each time the ratio gives you some comfort. That could be a more systematic approach.