Why you should bank on gold in these uncertain times

Build a 10-15 per cent allocation to the yellow metal in your portfolio to guard it against economic and geopolitical risks

Gold has rallied 3.48 per cent over the past one month and is now trading above the Rs 30,000-mark in the Indian market. In the international market too, it has breached the $1,300 per ounce mark — a level it had been unable to cross for about 10 months. Given the low likelihood of the US Federal Reserve raising interest rates in the near future, the escalating tensions vis-a-vis North Korea, and the stretched valuations of equities, investors need to have an allocation to this safe-haven asset. 

   

The primary factor behind the current rally in the price of the yellow metal is the weakening of the dollar. The dollar has declined about six per cent against the rupee, year-to-date. “The dollar has been weakening because the US Federal Reserve is sounding increasingly dovish in its view on rate hikes,” says Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management Company. 

The spike in geopolitical tensions vis-a-vis North Korea has also been positive for the yellow metal. “The sabre-rattling by North Korea, the missile tests it has held, and the exchange of words between Donald Trump and the North Koreans has also led to people buying gold in anticipation of further escalation in tensions,” says Mehta. 

Moreover, popular confidence in Trump's ability to push through his economic agenda, especially his tax cut proposals, is weakening. Finally, a surfeit of liquidity has driven the valuations of assets such as equities to high levels. Concerns around their stretched valuations also warrant an allocation to gold.

Where the yellow metal goes from its current level will depend again on the above-mentioned factors. A year ago, it was widely held that the world economy was on the growth path, and hence central banks such as the US Fed would be able to hike rates while the European Central Bank would begin to wind down asset purchases. But, things haven't panned out as expected. Faltering expectations regarding future rate hikes and escalation in geopolitical tensions will both be positive for gold.

Those looking to carry out short-term trading in the yellow metal should wait for a correction. “All the uncertainties have already got factored into the price. Unless tensions vis-a-vis North Korea escalate, a correction might be due,” says Prathamesh Mallya, chief analyst-non-agri commodities and currencies, Angel Commodities Broking. He advises traders to wait for the Rs 29,000 level to enter the yellow metal.

Long-term investors who hold gold as part of their asset allocation should either build a 10-15 per cent allocation or maintain it. "Since gold is negatively correlated with equities, having an allocation to it will reduce the overall risk in your portfolio," says Anil Rego, chief executive officer, Right Horizons, a Bengaluru-based financial planning firm. As for the instruments to use for investing in it, Rego suggests gold exchange-traded funds, gold savings funds (you can do systematic investment plans in them), and sovereign gold bonds (SGBs), which provide an annual interest income of 2.50 per cent of the initial investment. But, liquidity is an issue in SGBs. If you wish to exit them in the near future, you may have to sell them at a discount on the stock exchanges.