Exit route for gold investors?

Medium-term investors can hold, but don't sell debt or equity to expand the gold portfolio

It hasn’t been easy for investors in gold. With international prices of gold falling over 25 per cent in 2013, the outlook was quite grim at the start of the year. Indian investors, however, were saved from heavy losses in 2013 – only 2.5 per cent drop in gold prices – because of the falling rupee. Surprisingly, gold prices, in 2014, have not fallen further. In fact, they have risen by Rs 1,000 since January. So, should you increase your gold holdings or reduce them? Experts are unwilling to stick their neck out. The reason: Gold companies have started reducing production. This implies that gold prices will not go on a free fall anytime soon.

Madan Sabnavis, chief economist, CARE Ratings, expects gold prices to go up to $1,600-$1,700 in the next three-four years. “If you are a medium-term investor, it does not make sense to sell the yellow metal,” says Sabnavis, adding that hold on to gold, if you can. But it is not advisable to sell your other financial assets – debt or equity – to buy more gold. The reason: With interest rates likely to stay steady or most likely, fall over the next year, returns from debt will fall. But investors will gain, in terms of higher capital gains from their investments.

Similarly, the outlook on the equity market is quite uncertain due to the absence of any clarity on who will form the next government. “In any case, while the equity market might see a sharp spike if there is a stable government, but till the economic scenario improves substantially, this rally is unlikely to sustain over a longer period,” says a fund manager.

Investment experts are clear on one thing. If you have overloaded your portfolio with either gold coins or exchange-traded funds, prune it. “If money is required over the next three-six months, we are asking clients to liquidate gold and raise money. Otherwise, we are asking them to rebalance, according to asset allocation,” says Gaurav Mashruwala, certified financial planner. According to financial planner, Amar Pandit, if one is making good money on their investments, it could be a good opportunity to exit. Otherwise, if the returns are flat at five to seven per cent, it makes little sense to do so. “If there are investors who are looking for safe returns (without much volatility) of around 10 per cent over the next two years, they might as well sell and look at debt because the latter is likely to give similar returns over the next two years,” says Pandit. He feels that given that returns on gold for Indian investors is largely dependent on rupee besides demand as well, there are too many variables for the investors who want to play it safe.

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