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It makes sense to invest in gold now

September 26, 2017 08:44 IST

Gold looks cheap compared to the stock markets that are highly overbought at the moment.
Puneet Wadhwa reports.

Gold prices have outperformed the markets -- S&P 500 -- thus far in this century (since 2000), returning 86 per cent more than the market if both asset classes were indexed at 100 levels starting December 31, 1999, suggests the latest World Gold Council's Gold Investor report for September 2017.

 

Over the past 17 years, the S&P 500 has undergone two major contractions. Gold, meanwhile, has held its value well, highlighting its appeal as a portfolio diversifier, the WGC report says.

Seen as a safe haven asset, gold prices have been on an upward spiral since August-mid.

According to reports, gold prices have surged nearly 7 per cent from Rs 28,500 on the Multi Commodity Exchange to Rs 30,500 till September-mid.

Gold also looks very cheap compared to the markets that are highly overbought at the moment, reports suggest.

North Korea fears notwithstanding, major valuation averages are regularly hitting fresh all time highs.

As such, the gold-to-S&P 500 ratio is near 10-year lows, meaning the yellow metal is extremely undervalued, THE WGC says.

It is worth noting too, that the stock market rally (S&P 500) has been propelled disproportionately by only a handful of tech stocks, such as Apple, Amazon, Facebook and Alphabet.

As of August 1, the S&P 500 was up 10.5% year-to-date, but if information technology stocks were removed, the index was up around 7.5 per cent, a significant difference.

'That so few stocks have contributed so much makes the market particularly vulnerable, should those stocks see a major correction. It also underscores the need to diversify into safe haven assets, such as gold,' the WGC report says.

As a portfolio strategy, too, experts suggest investors should diversify their holdings into equities, real estate, insurance and gold.

"If one is clear about one's investment objectives, the periodicity of making an investment, have defined one's goals/objectives over the next few years, then creating a pool of assets should more or less ensure that the objective of deriving a sustainable Return of Investment is achieved," advises suggests Mayuresh Joshi, fund manager at Angel Broking.

"A small portion should get into investing in gold," Joshi adds, "as it creates a hedge both against the anomalies created by a rising equity market and inflation."

Photograph: Kham/Reuters

Puneet Wadhwa in New Delhi
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