As gold goes up and up, consider profit-taking and rebalance portfolio

Rebalance if overweight after recent surge; if underexposed, purchase systematically or during price dips

Gold has witnessed a strong rally, rising 16.1 per cent this calendar year. The yellow metal ended the previous week at Rs 73,110 per 10 grams, having scaled a closing price peak of Rs 73,183 a day earlier. Citi Research has forecast that its price could touch $3,000 per ounce over the next 6 to 18 months from its current level of $2,391.9 per ounce in the international market.
 

Experts believe gold could rally further. “With geopolitical tensions looming, the yellow metal is anticipated to gain further in 

the coming days. Our near-term target is Rs 75,300,” says Vaishali Parekh, vice-president, technical research, Prabhudas Lilladher.
 

Positive drivers
 

West Asia tensions: Fears that the skirmish between Israel and Iran could escalate into a full-blown war have sent investors scurrying into this safe-haven asset. “Fresh flare-ups in the west asia have raised concerns of a widening of the conflict, which has contributed to the recent run-up in gold prices. Gold could see further meaningful appreciation if the geopolitical situation deteriorates materially,” says Ghazal Jain, fund manager-alternative investments, Quantum Asset Management Company (AMC).
 

Central banks’ gold appetite: Central banks, which are trying to diversify their reserves, have been robust purchasers of the yellow metal in recent years. According to the World Gold Council, their net gold purchases totalled 1,037 tonnes in 2023. They remain active purchasers this year as well, led by China. “China’s continuous gold purchases over the past 17 months have kept sentiments firm in the precious metals market,” says Naveen Mathur, director, commodities and currencies, Anand Rathi Shares and Stock Brokers.

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Growth slowdown, rate cuts: A possible growth slowdown in the US and rate cuts could impact gold positively. “Gold, which has reached all-time highs despite the postponement of US interest rate cuts and the subsequent rise in US treasury yields and strengthening of the US dollar, appears disconnected from fundamentals,” says Jain.  
 

She explains that it looks like the markets are pricing in rate cuts given the dilemma the Fed finds itself in: sticky inflation on the one hand requires rates to be kept high while snowballing US government debt and concerns regarding a growth setback for the US economy in an election year demand some easing. “If the cuts come in even as inflation stays elevated, it will be a conducive environment for gold,” adds Jain.
 

Negative drivers
 

If geopolitical tensions ease, gold prices could decline. “We expect the war premium to get quickly unwound if geopolitical tensions subside soon. Gold could then see a correction of more than 5 per cent in the short term,” says Mathur.

If the Fed fails to meet market expectations regarding the quantum or timing of rate cuts, gold prices could consolidate. “That is because higher rates increase the opportunity cost of holding gold, a non-yielding asset,” says Jain. The downside, according to her, would however be limited.

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In India, higher prices have dampened consumer demand, which could continue to be affected in the near term. “Historically, the months of April and May during election years have witnessed a drop in imports on a year-on-year basis as gold consumption tends to fall ahead of the general elections,” says Mathur.
 

Portfolio diversifier
 

Gold is an excellent asset class for diversification and should be included in all long-term portfolios. “Invest 10 to 15 per cent of your portfolio in gold,” says Jinal Mehta, certified financial planner and founder, Beyond Learning Finance.
 

Parekh says the ongoing geopolitical tensions in the west asia and the uncertainty due to the election season can contribute to a further rise in the price of gold. Hence, one should stay invested in it.
 

Those who hold more than 
 

the ideal allocation may consider booking profits to rebalance their portfolios, given the recent surge, suggests Jain.

As for when one should add to one’s holdings, Jain explains that a pullback in prices following the recent surge could present a good opportunity to increase allocations and benefit from gold’s favourable medium-term outlook.
 

Options for buying gold
 

Several options are available for holding gold. “Gold can be bought physically, or as exchange-traded funds (ETFs) and gold funds,” says Jigar Patel, member, the Association of Registered Investment Advisors (ARIA).
 

Investors can choose gold ETFs with low tracking errors. Those who want liquidity should opt for ETFs or gold mutual funds (MFs). The latter are suited for investors planning to invest via the systematic investment plan (SIP) route.
 

Go for sovereign gold bonds (SGBs) if you can stay invested for five to eight years. “Investing in SGBs, which offer tax-free maturity proceeds and a 2.5 per cent annual coupon, might also be advantageous,” says Mehta.