Want to lend some stability to your portfolio? Go for gold as a hedge

With both equity and bond markets likely to be disturbed this year, investors should allocate about 10 per cent to gold as a hedge against volatility

The price of gold recently touched a 15-month high of Rs 31,820 for 10 grammes. In doing so, it crossed the level seen in November 2016, the month when Prime Minister Narendra Modi announced his government’s ‘demonetisation’ decision revoking the legal-tender status of old Rs 500 and Rs 1,000 currency notes. In the global markets, it is trading at around $1,358.70 an ounce.

Over the past year, the yellow metal has risen 4.19 per cent in India and 9.34 per cent in the international market. With both equity and debt markets expected to be volatile in 2018, investors should diversify their portfolios into gold to lend some stability to it.

One reason for the rise in the price of gold in the international market is the dollar's movement. "When the US Fed started rolling back its quantitative easing (QE) programme, the dollar appreciated. But as other countries also started tapering, the dollar started weakening against a basket of currencies. This weakening of the dollar helped gold do well in the international market over the past year," says Chirag Mehta, senior fund manager, Quantum Asset Management Company.

Other factors that have allowed gold to do well is the recent volatility in both global bond and equity markets are “global inflation outlook and volatility in other asset classes”, according to Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. Globally, investors have begun buying gold as a safe haven to provide stability to their portfolios in the times of volatility. Rising inflation in the developed world has also propelled investors towards the yellow metal.

The recent crash in the price of Bitcoin has also had an impact on gold, at least a short-term one. Earlier, many investors had begun to prefer Bitcoin to gold as an alternative asset class in their portfolios. But the massive fall in its price – from $19,351 on December 17, 2017, to as low as $7,054 on February 6, 2018 – made many investors feel that they didn't have the stomach for such high volatility. Many such investors returned to gold. Mehta, however, says that the impact of Bitcoin on the price of gold will be marginal and short-term, and the yellow metal's longer-term price movements will be driven more by macroeconomic factors.

In India, the appreciation in the price of gold has been less than in the international market. This is because the rupee has strengthened against the dollar over the past year, leading to lower gains for Indian investors. Despite being a major consumer of gold along with China – India accounts for around 20 per cent of annual gold consumption globally – India is primarily a price taker, which means that prices here are driven primarily by what is happening in the international market.

The US Fed has spoken of three more rate hikes this year. Hardening bond yields in the US have already caused panic in asset markets. “With equities and bonds likely to face a challenging environment, gold could be a good choice in that environment for a portion of the portfolio,” says Dhawan. He suggests that investors should allocate 10-15 per cent of their portfolios to gold through sovereign gold bonds. Mehta, too, is of the view that investors should have a 10 per cent allocation for gold. "With such an allocation to gold, returns improve marginally and risk also reduces significantly," he says.