Apr 23, 2013, 05.16 PM IST
The gold prices have crashed and as a result investors are a worried lot. An asset class that has been shinning for long has suddenly lost its sheen. No wonder, there are mixed reactions from investors. Read this space to know if you should buy, sell or hold gold now?
The gold prices have crashed and as a result investors are a worried lot. An asset class that has been shinning for long has suddenly lost its sheen. No wonder, there are mixed reactions from investors. While on the one hand there are investors who are not sure about what to do with their investments in gold, on the other hand there are those who are wondering whether there is an opportunity to buy gold at the current prices and make a quick buck.
While investors’ dilemma is understandable, one of the factors that they need to consider while deciding on whether to buy, sell or hold investments in gold is the reason for investing earlier as well as at the current levels. A better understanding of the role of gold in their asset allocation process can help them tackle the complexity of the current situation. In fact, knowing that there is more than one reason to have gold in their portfolios at all times could soothe the frayed nerves of investors.
First, there is a merit in making gold an integral part of the portfolio as it has a negative correlation with other preferred asset classes. Second, since gold is both a commodity as well as currency, the sources for its demand are far more diverse. A wide range of buyers like the jewellery sector, financial institutions, manufacturers of industrial products as well as various investment channels including coins and bars, gold ETFs and e-gold also make liquidity risk very low. Third, investing in gold does not carry a credit risk.
Of course, one faces the risk of price fluctuations. However, the volatility can be tackled by investing systematically as well as by choosing the right way to invest in the gold. Remember, buying paper gold through options like gold ETFs and gold savings funds can be a simple and tax efficient way.
Another objective of investing in gold could be to accumulate it for a special occasion like children’s marriage. Therefore, for someone who has been investing in gold for this very purpose with a time horizon of say 10-15 years, there is no reason to panic. In fact, the periods of extreme volatilities could help him in bringing his average cost down.
Therefore, all those investors who have been investing in gold in a disciplined manner and as a part of their asset allocation process would do well to not only hold on their investments in gold but also continue investing systematically through their defined time horizon. There could be prolonged periods of not-so-encouraging performance, but that is understandable for an asset class that has been giving phenomenal returns over the last decade or so. However, it would be prudent to have a close look at the level of exposure in gold vis-a-vis their overall portfolio size. Ideally, the exposure to gold should not be more than 10 percent of the portfolio at all times.
While a disciplined approach to investing in an asset class like gold can benefit investors over time, any attempt to make ad hoc decisions can be risky. Hence, anyone who may be considering taking advantage of the steep fall in the gold prices to make quick money will do well to remember that such decisions can backfire at times. The key deciding factor should the likely contribution of an investment decision to the long-term prospects of the portfolio.
Then there are investors who have been investing in gold with a sole objective of benefiting from the momentum in the gold prices. As always, in the absence of any defined time horizon, decision making can be a little tricky. Therefore, considering that gold prices can fall further from the current levels and that the volatility in the gold prices is likely to continue for some time, it may be time for them to prune the exposure and invest elsewhere.
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