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Why you must invest in gold

Last updated on: April 25, 2012 09:52 IST

Why you must invest in gold

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Hemant Rustagi

Gold has been performing well over the last 10 years. But, many investors are facing the dilemma of whether or not to invest in it at the current levels.

Gold's subdued performance over the past six months has also raised doubts in their minds about its potential.

No doubt, past performance is an important decision-making criterion. However, relying on it alone is never a wise thing to do.
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Image: customer looks at gold bangles inside a jewellery showroom in the southern Indian city of Hyderabad.
Photographs: Krishnendu Halder/Reuters.
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Why you must invest in gold

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It can result either in over-exposure or under-exposure to an asset class, depending on how good or bad the asset class has been performing in the recent past.

If you are a long-term investor, consider factors such as the contribution of an asset class to your asset allocation process, its ability to hedge inflation, liquidity, flexibility and tax-efficiency of the mode chosen to invest in that asset class.

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Image: A customer tries on a gold necklace inside a jewellery showroom in the southern Indian city of Hyderabad.
Photographs: Krishnendu Halder/Reuters.
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For example, if your objective is to accumulate gold for gifting it to your children on their marriage, the focus should be on investing through your time horizon, rather than worrying about price fluctuations.

As an investor, you must ensure proper asset allocation. Relying mainly on equities and debt instruments alone to achieve diversification in the portfolio may not be the right strategy.

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Image: Gold biscuits are displayed inside a jewellery showroom in the southern Indian city of Hyderabad.
Photographs: Krishnendu Halder/Reuters.
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Gold can be an integral part of your portfolio, as it has a negative correlation with the other preferred asset classes. 

The price of gold retains its independence, mainly because the fundamental factors that impact it are different from those that affect other asset classes. Moreover, the sources of demand for gold are far more diverse.

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Image: A salesgirl is reflected in a mirror inside a gold jewellery showroom on the occasion of Akshaya Tritiya, a major gold buying festival in Kochi.
Photographs: Sivaram V/Reuters.
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The existence of a range of buyers, such as jewellers, financial institutions, makers of industrial products as well as investment channels, including coins and bars, gold ETFs and e-gold also cuts the risk of liquidity.

Besides, demand and supply factors do not always have the same impact on gold, as they do on other commodities for its hybrid nature - gold is a commodity, as well as a currency.

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Image: A woman tries a gold earring inside a gold jewellery showroom in Kochi.
Photographs: Sivaram V/Reuters.
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Gold is also a protector of wealth against inflation and can provide good returns over time.

Another major advantage of investing in gold is it does not carry a credit risk.

Of course, you may face the risk of price fluctuation. But, you can tackle it by investing systematically over time.

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Image: Gold bars are displayed at a gold jewellery shop in Chandigarh.
Photographs: Ajay Verma/Reuters.
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Evidently, gold, as an asset class, has a lot to offer. Therefore, the issue is not whether or not you should have gold in your portfolio, but how much exposure should you have to it.

While the thumb rule says it should be 10-15 per cent of your portfolio, the actual exposure would depend on the role you would like gold to play in your portfolio. 

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Image: A salesman displays gold bangles to a customer at a jewellery showroom in Chennai.
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It is equally important to invest in gold by choosing the right option. There are hassle free options, such as Gold ETFs, gold savings funds and e-gold.

The key is to realise that investing in paper gold is more beneficial than buying physical gold, especially if it is for investment purposes.

The writer is CEO, Wiseinvest Advisors



Image: Customers crowd at a gold jewellery showroom on the occasion of Akshaya Tritiya, a major gold buying festival in Kochi.
Photographs: Sivaram V/Reuters.

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