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Time to take some profits off the table after gold’s sharp rally

If there is too much gold in your portfolio, you can afford to book some of the gains

May 07, 2020 / 11:52 AM IST

Amidst falling equities and struggling debt markets, gold has been a bright spot among asset classes. Gold exchange-traded funds (ETFs) have delivered 47 percent returns over the past one year. Given the splendid run that the yellow metal has had, is it time for investors to turn cautious? Would taking some profits off the table be appropriate?

Interest in gold rises

With rising global trade tensions and geo-political risks, gold as an investment avenue gained more traction over the last couple of years. Slowing economic growth and falling interest rates added to investor interest.

In a recent report, BofA Securities has indicated that gold prices would touch US$ 3,000 per ounce in 18 months. Gold now hovers around US$ 1,710 per ounce.

In April, the World Gold Council announced that gold ETFs saw the highest quarterly inflows in four years during the first quarter of CY-20.


Gold mining and recycling took a hit due to the lockdowns imposed to contain the spread of the coronavirus. The supply of gold contracted four per cent. There is an expectation that gold scrap sales would rise after the lockdown ends. But gold prices are expected to remain strong in the medium term.

Sumeet Bagadia, Executive Director of Choice Broking, expects gold prices to touch Rs 48,000 per 10 grams level in 18 months. “Looking at the possibility of a global economic slowdown and uncertainty over phase two trade deals after US presidential elections, gold continues to serve as a safe haven for investors,” he says. Gold trades at Rs 45700 per 10 grams on the Multi commodity exchange.

Making a decision

Figure out how much of your financial portfolio is in gold. Also, do account for coins and bars, if you have bought them as investments. “Gold should not be your core portfolio. At the higher end, you should have 15 per cent of your portfolio in gold and other thematic funds, including global exposure,” says Amol Joshi founder of Plan Rupee Investment Services.

If the allocation to gold is much higher than what is desirable, as mutually decided with your investment advisor, you can consider exiting gold investments. Mild deviations, however, do not matter.

What should you sell?

If you are highly overweight on gold in your portfolio, you can afford to book some profits. Selling bullion gold is not possible due to the lockdown. “Ideally, sell gold ETFs and gold savings funds first, as they are less efficient compared to SGBs (sovereign gold bonds) on tax, cost and income parameters,” says Joshi. Investments in SGBs are made at almost zero cost and they earn an interest income of 2.5 per cent a year. Gold ETFs and gold saving funds have an expense ratio and they do not earn any income. Also, if you hold on to SGBs till maturity, then your capital gains are tax-exempt. Capital gains earned on gold ETFs and gold savings funds after holding them for more than three years, are taxed at 20 per cent after indexation benefit.

The way forward

After selling your gold investments, the proceeds can be deployed in equity funds, in a staggered manner, as there is a high chance that you are under-invested in stocks at this moment. If you want to shore up your fixed income allocation, you can opt for liquid or short-term debt funds. Banking and PSU Debt schemes too may be considered.
Nikhil Walavalkar
first published: May 7, 2020 09:18 am

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