Since the beginning of 2008,the Sensex has plummeted 53 per cent. The property market was also in the doldrums. One asset class that shone,however,was gold. An investment that does well when the economic environment is bleak,gold should always constitute a part of your portfolio.
Last year if you had bought gold on January 1 and sold it on December 31,you would have made a handsome gain of 22 per cent. Gold has outperformed equities over the ten-year,five-year and three-year horizons (see table). However,there is a catch here and one shouldnt conclude that gold outperforms equities over the long term. Says Veer Sardesai,a Pune-based financial planner: This out-performance is due to the statistical point error (taking two points for calculation). One should go for the averages of each month or year for comparing performance. Today equities are at an all-time low and gold is at an all-time high. Cycles in gold are far more severe than in equities. Gold is generally not expected to give returns comparable to equities.
While the returns from gold were handsome,it also displayed a lot of volatility: its price oscillated from Rs 10,874 per 10 gram to Rs 14,006. Thats because the price of gold is correlated with that of other assets: positively with oil,and negatively with the dollar. And both these assets fluctuated quite a bit last year. From the beginning to the end of the year,the rupee depreciated 23 per cent against the dollar. Oil prices first rose to $145 per barrel (till July 3),and then declined by 76 per cent from this peak level. Says Naveen Mathur,head of commodities,Angel Broking: The volatility in gold can be attributed to a variety of factors: the economic downturn that reduced demand,the movement of the dollar against the rupee,and the steep rise and fall in crude oil prices.
Outlook for 2009
After a stellar run last year,the near-term outlook for gold is now weak. In 2009 gold is expected to trade between $700-800 per ounce,slightly lower than the current levels. Its price may stabilise in the latter half of 2009, says Bhargava Vaidya,a Mumbai-based gold analyst. According to Lovaii Navlakhi,chief financial planner,International Money Matters,This asset is now volatile,as is the case with other paired asset classes such as oil and the US dollar. It also has a downward price risk. Aseem Dhru,chief executive officer and managing director,HDFC Securities is bullish on gold. Whenever the dollar weakens,gold appreciates. And we expect the dollar to weaken in future, he says.
Should you buy?
Despite golds near-term weak outlook,financial planners are still recommending that you hold some amount of it in your portfolio. One cannot ignore this asset class as the financial markets are still not out of the woods. And in uncertain times it is preferable to have some portion of your portfolio in gold, says Navlakhi. According to him,gold should constitute 5-15 per cent of your portfolio. Besides the uncertain economic environment,there are other reasons why gold should always constitute a part of your portfolio: as hedge against inflation (the 10-year average annual inflation stands at 7.1 per cent,while the 10-year compounded annual return from gold is 12.3 per cent) and as portfolio diversifier. When all the stock markets around the world are collapsing,you will see gold rallying smartly, says Dhru.
The biggest mistake you can make is to buy physical gold or jewellery,when you are buying it as an investment. Instead buy gold exchange traded funds (ETFs). Around 5 per cent of your portfolio should be invested in Gold Bees,which can be built up in a staggered manner, says Navlakhi.