Maintain 8-12% allocation to gold

If the US starts a trade war and follow weak dollar policy, later in 2017 gold will rise

After languishing for three years (2013, 2014 and 2015) gold turned in a reasonably good performance in 2016 at 11.23 per cent. This year the yellow metal is off to an early start and has clocked gains 4.69 per cent year-to-date in the Indian market and 6.43 per cent internationally.

Traditionally, January has been the strongest month for gold for the past decade. This seasonal upswing is driven by Chinese buyers purchasing gold for the Lunar New Year, and Indians buying it as they prepare for the marriage season.

This year uncertainty arising from Trump's first policies have also led to increased gold allocation. "Weaker than expected economic data along with Trump’s unconventional rhetoric on trade and currencies led to a depreciating US dollar, which supported gold prices," says Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management Company.

There is fear that Trump may start a trade war, leading to a renewed race among countries to devalue their currencies. If the US administration also follows a weak dollar policy, that will be positive for gold. Higher inflation in the US, which could come from housing prices, uncontained medical inflation, rising wages, and so on, will also be positive for gold. If the Fed hikes interest rates faster than inflation, and manages to keep real interest rates in the positive zone, that will be negative for the yellow metal. "Investors should focus on the relationship between gold on the one hand and the US dollar and real interest rates on the other," says Mehta. If Trump's policies cause loss of faith in him and lead to fear in the markets, people may move into gold, which is seen as a safe-haven investment. Mehta expects gold to pause in the near term and then move upward in 2017.

When the equity markets underperform, gold provides ballast to your portfolio and prevents it from taking a big knock. Indian investors should maintain an 8-12 per cent allocation to the yellow metal because of its role as a portfolio diversifier. If prices fall and they become under-allocated to the yellow metal, they should buy more. On the other hand, if gold prices rise and their allocation to the yellow metal rises above their pre-assigned level, they should book profits. Following this simple approach will enable them to buy low and sell high. By investing in sovereign gold bonds, they can even earn interest on gold (2.50 per cent), an option that is not available in any other gold-related holding (ETF, coins or jewellery, all of which give only capital gains or loss).