The ‘Golden Touch
Vikas Tulsyan
MD, Vision Ahead Services Pvt Ltd
When it comes to asset allocation, equity, debt and real estate form the staple asset classes. As for gold as an asset class, it always creates some sort of confusion in the minds of investors who remain unsure whether to have exposure to it or not. However, what is often forgotten is that gold plays an important role in the asset allocation process. When asset classes like debt instruments, currency and equity turn volatile due to various domestic and international developments, gold, popularly known as the yellow metal, emerges as a ‘safe haven’. Investors, banks, financial institutions et al flock to accumulate gold in order to reduce risk to the overall portfolio and tap into the handsome returns delivered by gold as an asset class.
Potential Investment Option
A year back, in the Indian context, gold was the least discussed investment option. This was largely due to demonetization and its impact on the value of savings. Hence, the yellow metal turned into a forgotten asset class. However, attention was drawn towards it in order to explore its future potential in terms of generating returns for investors. In the Indian subcontinent, the yellow metal is of greater significance due to social and cultural reasons. For centuries, gold has been synonymous with wealth, status, security and protection. In traditional Indian families, gold is considered auspicious and regularly purchased on various occasions.
Hence, it is easier to paint a picture in the minds of investors of the potential returns which could be achieved by allocating a sizeable portion of their portfolio in gold. The following reasons convinced me a year back to take a call on increasing asset allocation towards Gold.
✓Deteriorating Indian economic fundamentals coupled with overvalued rupee. n ✓Major central banks continuing with gold purchases.
✓As an asset class, gold delivered negative return over the past six years, thereby providing a comfortable entry point.
✓Probable escalation in the US-China trade war.
✓Global economies moving from globalisation to localisation, courtesy US’ President Donald Trump.
✓Financial crisis of 2008 is still left unresolved. At best the crisis has only been postponed thanks to the continuous stimulus being provided, all of which is leading to unsustainable debt levels globally.
✓Bullion production growth is around 1% annually while the Federal Reserve is creating money supply at the rate of 30%, which is much higher than the peaks of 1970s and 1980s.
✓Increased geo-political uncertainty.
All of these factors lead one to believe that gold as an asset class will shine in the Indian market in the near future. Owing to the investments made in gold, many investors are now reaping sizeable gains.
Current Status
The US Federal Reserve is printing money in huge quantities as a solution to all its problems. Sooner or later the world will realise the disastrous consequences of providing such unrestrained stimulus. The dollar risks losing its value and at some time in the future the central banks may revert to the gold standard. The naysayers’ argument against the yellow metal is that it has no yield. But yield represents counterparty risk. In a world where global economy came to a grinding halt for more than a month and central banks are out buying assets and pushing yields into the negative territory, the question is do you really want counterparty risk? Even when it comes to equities, too much money is chasing too few stocks of corporate giants which in the foreseeable future will be reporting negative to dismal earnings.
The other factor which needs to be pointed out in terms of gold is the popular perception that the price movement in gold is decided on the basis of retail buying, namely, jewellery. This can be at best described as an absurd theory. Historically, gold prices move in tandem with the expanding monetary base of currency in the world. The price of the yellow metal is also influenced by debt deflation probabilities. In conclusion, it can be said that the Federal Reserve can print money but not gold. Gold is an inherent store of value, and everything else is credit. For a person who follows the asset allocation discipline and understands the importance of a diversified portfolio, at least 20 per cent of the portfolio should be allocated to gold. Gold gave 11.8 per cent CAGR in last 50 years with max drawdown of 22 per cent will you not buy a big chunk of it! Going forward, this asset class won’t be a disappointment for the early movers.
The writers is a Managing Partner, Vision Ahead Services Pvt Ltd
Email id : visionaheada@gmail.com
Website : www.vaspl.co.in