Should investors still believe in gold?

Gold has dulled a lot lately but investors could still take a shine to it, say experts. Since the start of the year, its price has plunged 16.8 per cent (in dollar terms). Institutional and hedge fund investors sold their holdings for opportune trades in other asset classes or in Japanese markets, even as US Fed Chairman Ben Bernanke hinted at cutting back quantitative easing while the dollar rose against major global currencies.

Global institutional investors were pulling out and investing in other financial assets. All this led to a large sell-off in gold and it dipped 13 per cent (in rupee terms) as the rupee was weaker. Says Ajay Bagga, head, private wealth management, Deutsche Bank India: "The speculative element has got knocked out of gold as some of the long positions have come off."

Trend watchers pressed further sales as key market levels were breached, aggravating gold's fall.

Says Chirag Mehta, fund manager, commodities, Quantum AMC: "Gold dipped as hedge funds sold some of their holdings to chase relative opportunities. The sell-off triggered some key technical levels and aggravated the fall."

Similar trends were seen in India as local investors redeemed gold worth nearly Rs 77 crore and Rs 123 crore, respectively, in March and April. Coupled with the price fall, gold exchange traded fund (ETF) assets under management in India dipped 11 per cent since the beginning of this year, to Rs 10,629 crore. Retail investors stepped up sales in May.

However, that shouldn't deter investment in gold, as the precious metal has not completely lost its sheen.

Gold has been a traditional safe haven against inflation; lately, too, against the massive printing of money worldwide and the debasement of currencies. Says Bagga: "The currency story is an unfinished one. There's going to be debasement, as there's an undeclared currency war to depreciate currencies and boost exports across the globe."

This would still mean that demand for gold from safe-haven investors against massive depreciation in the currency will happen over the longer term. Nevertheless, Bagga feels other financial assets such as debt are a better investment than gold at the moment. He, therefore, recommends that investors bring down their gold holding from 5-10 per cent to two to four per cent of their portfolios.

According to the World Gold Council, physical demand for gold from India and China was 345 million tonnes (mt) in the first quarter of this calendar year. Investment demand has, however, taken a beating, with gold ETFs selling 177 mt in the same quarter. Says Lakshmi Iyer, head, fixed income and products, Kotak Mutual Fund: "Demand for gold is still high in India and at lower levels, a lot of people are coming ahead and buying gold. Gold can still be a part of your asset allocation." However, with interest moving on to other financial assets where returns are more obvious, gold exposure can be scaled down. Says Mehta: "One must not make all gold investments at once but stagger investments as and when the price falls."