Gold-plated silver lining for investors

Gold as an asset class, with more than 49 per cent return over the past one year, has outperformed all other asset classes and matched the rise of crude oil. Against this past performance and expectations of even higher oil prices and inflation rate makes gold an ideal fit in an investor’s portfolio.

“Its low correlation with equity provides stability to the portfolio and it also provides a hedge against inflation which is critical at current levels of inflation,” said Rajan Mehta, executive director, Benchmark Mutual Fund, that runs a gold exchange traded fund (ETF)

Equity markets have a negative correlation with inflation and hence returns dip when inflation rises. Gold, on the other hand, has a positive correlation with inflation and thus preserves its value in an inflationary environment. “Gold has three internal characters,” said Keyur Shah, associate director, World Gold Council. “A portfolio diversifier, hedge against inflation and preserving its value.”

Gold as an investment at current levels will make sense only if one knows the factors that are driving them currently and where the prices are headed.

“The volatile economic scenario, weak dollar against euro and correction in the global markets is the prime reason why investors are investing in gold,” said an industry insider, who didn’t want to be quoted. “This is driving the demand and hence the prices. Going forward the price outlook for gold is bullish.”

As the outlook on oil prices is not clear and lack of clarity on equity market movement prevails, gold will continue to attract investment and hence be in demand. This makes an ideal case for investment in gold even at current levels of around Rs 13,000 per 10 grams.

Investors can look at gold ETFs to invest in gold. In the past gold ETFs have gained prominence. “We have seen an incremental investment of 60 per cent in our gold fund since the NFO,” said Mehta.

Ideally, ETFs should be the way to invest in gold. “ETFs have low charges and no security threat,” said Veer Sardesai, a Pune-based financial planner.

But ETFs in India are not popular. “That’s because of lack of access in absence of demat account and PAN (permanent account number) card and cultural reasons as investors don’t want gold in paper form,” Shah.