Investors should cap gold allocation at 10-15 per cent and consider staggered purchases through gold ETFs.
Key Points
- Gold has rallied 9.6 per cent in a month, but investors should prepare for volatility rather than chase prices.
- Expectations of lower real rates, US fiscal concerns and central-bank buying are supporting demand for gold.
- Further monetary easing, weaker dollar and persistent fiscal uncertainty could extend gold's rally in coming months.
- A hawkish US Federal Reserve, higher real yields, stronger dollar and profit booking could trigger a correction.
Gold has gained 9.6 per cent over the past month after returning -1.8 per cent over the past year.
The rally may continue, but investors should be prepared for volatility and avoid chasing the yellow metal after its sharp rise.
Drivers of the rally
Expectations around US Federal Reserve policy and bond-market interventions that signal lower long-end US Treasury yields are supporting gold.
"Expectations of lower real rates have supported the demand for non-yielding gold," says Mohit Bagdi, head of research, MIRA Money.
US fiscal concerns are another driver.
"US national debt nearing $40 trillion has contributed to the debasement trade," says N S Ramaswamy, head of commodities, Ventura.
Investors fear that high government debt could weaken the dollar. They are therefore shifting money into assets such as gold that cannot be created as easily as paper currency.
Central-bank buying, geopolitical tensions and safe-haven demand have also contributed to the rally.
Rally may continue
Monetary easing and anticipated interest-rate cuts could push gold higher.
"The run-up could continue if the Federal Reserve's September 15-16 meeting produces a favourable announcement," says Gnanasekar Thiagarajan, director, Commtrendz Research.
"Lower real yields and a weaker dollar could support gold," says Bagdi. Persistent fiscal uncertainty could also lend support.
"The absence of a solution to the roughly $40 trillion US debt could support the run-up," says Thiagarajan.
Continued central-bank reserve diversification could also contribute to the rally. Unpredictable tariff and sanctions policies could push investors towards gold.
"The rally is likely to be considerably more volatile and is unlikely to move in a straight line," says Bagdi. Short-term pullbacks remain likely.
Correction triggers
A reversal in the interest-rate outlook is the biggest near-term risk. "A hawkish Federal Reserve could weaken gold," says Ramaswamy.
Higher real yields increase the opportunity cost of holding a non-yielding asset such as gold.
"A rise in real yields could result in capital moving into government bonds," says Ramaswamy.
A stronger dollar could affect gold's price adversely.
"Profit booking after the run-up could also lead to a correction," says Thiagarajan. If geopolitical tensions cool, investors could shift money from gold to riskier assets.
"Risk-on rotation and broader equity allocation could cause gold to underperform," says Ramaswamy.
Avoid going overweight
The market appears to remain in a bull run. "However, it is volatile and sensitive to even the minutest signals," says Thiagarajan.
Investors should view gold as a portfolio hedge and wealth protector, not a vehicle for maximising returns.
"Gold can help balance a portfolio during periods of market volatility and inflation," says Harsh Vira, chief financial planner and founder, FinPro Wealth.
Gold allocation should not exceed 10-15 per cent of the portfolio. Investors whose allocation has risen after the rally should rebalance.
"If gold exceeds 15 per cent of an investor's assets, partial profit booking and portfolio rebalancing are recommended," says Ramaswamy.
Stagger purchases
New investors should avoid investing a large amount at one go. "A large rally can be followed by mean reversion," says Bagdi.
A SIP can average the purchase price. "Regular investing reduces the risk of entering at the top after a sharp rally," says Vira. Lump-sum investments would make sense only if prices correct.
Investors should ideally stay invested for at least five years to benefit from gold's role as a portfolio hedge.
Choose gold ETFs carefully
Exchange-traded funds (ETFs) are a preferred route to gain exposure to gold.
"Check a gold ETF's tracking error, expense ratio, and liquidity," says Vira. A lower tracking error means the ETF follows gold prices more closely, while the expense ratio affects holding costs.
"A reasonable asset size generally supports smoother execution and better efficiency," says Vira.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Aslam Hunani/Rediff
