Should Gold become a part of your portfolio?

Diwali, the festival of lights, is also an auspicious time for the Indian families to buy gold. Indians have since ages been in the awe of the yellow metal. Record amounts worth of gold is bought on the auspicious days of Dhanteras and Diwali.

Gold serves an important objective in the traditional Indian families. It is used as a store of value of money. It is also used as gifts being given to the children at the time of their marriage. It is also used in form of jewellery.

All these uses are very well known. Of late, there have been discussions about gold as an investment. It has caught fancy of many investors across the world in the last few years. Investors like Jim Rogers have also talked a lot about gold as an important investment. Gold ETFs have been gaining popularity and growing in size. Dollar's decline is considered to be good news for investment in gold.

Let us see if investment in gold really makes sense. Should it be a part of one's portfolio?

To begin with, gold is not like the popular asset classes - equity, bonds or real estate that generate economic output in form of profits (and dividends) by companies or interest income or rental income. Investor in gold cannot get dividends like company shares, nor does one get interest income like bonds. So what does gold give us? Why should we invest in gold? Should we invest at all?

Well, to answer the last question first - yes, there is a case for investing in gold. Having answered that question, we will now consider the first two questions.

The reasons why gold makes a very important investment option are as under:

• A store of value of money: We already mentioned about this in the initial part of the article. Historically, gold has served as a store of value for its chemical properties. Unlike most other metals, gold does not lose its chemical properties either through corrosion, rust, etc. It does not lose its shine also through oxidisation, which causes silver to turn black over a period. In short, over a period of time, gold does not lose its purity.

• It is also not available in abundance unlike something like iron or copper or aluminium.

• The gold was used to control the amount of currency that any government could put into circulation. Thus, it was a fantastic protection against the purchasing power of money. Of course, now with the removal of this gold standard, there are questions regarding the ability of gold to protect purchasing power.

• The most important reason why gold should be a part of one's investment portfolio can be explained through the theory of asset allocation. Asset allocation recommends that one's money should be spread across different investment options, which have low degree of correlation. That means, if the price of two investment options do not move in the same way over short periods of time, these options are ideal candidates to be a part of the same portfolio. Such a quality or different price movement between two different options reduces the fluctuations of the total portfolio. Gold has historically exhibited different price movement compared to stocks, bonds and real estate. That single reason is enough for one to consider putting some amount of money in gold.

- Amit Trivedi

The author is proprietor of Karmayog Knowledge Academy. He can be reached at karmayog.knowledge@gmail.com

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