Gold proves a safe bet for anxious investors

For Rahul Rastogi, a risk analyst in a foreign bank, the last two days...

For Rahul Rastogi, a risk analyst in a foreign bank, the last two days have spelt turmoil in his investment portfolio. With more than 40 per cent of his portfolio shaved off, he is looking at other asset classes to lend his portfolio some diversification, reduce risk. “I am looking at gold as it is safe and has little correlation with the market,” he said.

However, it’s not going to be easy to diversify to gold. Reason: in the past week, gold has followed the Sensex, falling 4 per cent. Experts sound the caution bugle. “Physical demand for gold has dried up and it is still trading at a very artificial level of 11,000 points,” said Bhargava Vaidya, a Mumbai-based gold analyst. “I am expecting gold to come down further. For an investor to enter, it will make sense when the gold trades at around 10,000-10,500.”

Blame the global slowdown for this turn. “The tumble in the stock market globally as well as in India has led to a drop in other asset classes as a spin off,” said Jayant Maglik, head (commodities business), Religare. “People are booking profits in other asset classes, gold being one, to compensate the loss in the markets.”

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But this is a temporary phenomenon Manglik added. “Gold is influenced by the value of dollar and interest rates,” he said. “Both dollar and interest rates are looking down and hence the fundamentals are strong for gold. However, due to volatility in the stock market, prices might fall further but it is bound to look up in the long term.”

A weakening dollar directs investments into gold and so do declining interest rates. “Higher interest rates mean higher opportunity cost for investment in gold,” said Rajan Mehta, executive director, Benchmark AMC, which launched its gold exchange traded fund last February. “Hence, a cut in interest rates brings more investments in gold.”

At a strategic level, financial planners advocate only a small percentage of investments in gold. “If invested over a horizon of 15-17 years, gold offers around 1-2 percentage points over inflation,” said Veer Sardesai, a Pune-based financial planner.

“Unlike oil, which can be consumed and therefore runs the risk of being in shortage, gold is held by most governments as securities and hence does not run that risk.” What gold offers, therefore, is relative stability and excellent liquidity. “This is the reason why we recommend 5 per cent of one’s portfolio in gold,” Sardesai said.