Why you must have gold in your investment portfolio?

Anil RegoRight HorizonsJaved Khan has been an avid investor in equities and mutual funds for a long time. During a recent visit abroad he found that a lot of his friends were investing in gold and they all believed that gold would be an important investment in the coming years. While Javed found these arguments exciting, he was not really convinced that gold could be a good investment. He had grown up seeing his family members obsessing over gold and jewellery. He had always considered gold an idle investment and was not convinced that gold could be an investment.On his return to India, Javed spoke to his financial advisor about the idea of buying gold as an investment. He was surprised when his financial advisor told him that gold must constitute at least 7-10% of his portfolio. He decided to delve a little deeper by accessing the website of the World Gold Council and prepared a list of five questions to discuss with his financial advisor. At the end of the discussion, Javed’s conclusions were roughly as under:Gold is a good asset class when there is global uncertainty...That has been a historical trend with gold. Between 1971 and 1980 when the world was racked by the Arab-Israel war, Oil embargo, Iran-Iraq war and Russia’s invasion of Afghanistan, the price of gold went by from $35/oz to $900/oz in a span of 10 years. Gold has typically been the only asset which holds value in times of global uncertainty. With crisis in oil, Middle East politics, Russia and in the South China Sea, gold may be a good idea as a safe haven.Gold is a good investment when currencies are becoming less reliable...During the last 8 years since the crisis, central banks of the US, EU and Japan have printed their currencies overtime. This has led to many currencies losing value due to too much supply of currency. Under these circumstances, gold is a great investment as its supply is finite and nobody can go on minting gold. Hence it will also be valuable. In other words world currencies are losing value gold emerges as an alternate currency. That is a good investment case for gold.Gold prices will be driven by increasing demand...Demand for gold comes from usage and storage. China and India continue to be two of the largest markets in the world in terms of jewellery demand. This is a kid of perpetual demand that will continue to drive gold prices. Storage demand comes from central banks and ETFs. Many central banks are buying more gold as they are unsure of holding too much of their reserves in dollars and euro. This storage demand will drive much of the demand for gold and take prices higher.Gold can be held in non-physical form which makes it easier...In the past, one had to hold gold only in physical form. Protecting the gold had a cost and hence nobody was too keen to store gold. Things have changed in the last few years. Today you can hold gold in the form of Gold ETFs. These exchange traded funds (ETFs) actually hold gold in their vaults and issue units against this gold holding. The price of these gold units will move with the price of gold. Since you can hold these ETFs in demat format, there is not risk of theft, pilferage or loss of value. Currently, the Indian government also permits you to hold gold in the form of gold bonds where you can also earn a nominal rate of interest over and above the appreciation in price of gold.It is actually risky not have gold in your portfolio...Javed concluded that it is actually risky not to have gold in your portfolio. Firstly, gold does not move in tandem with equities or debt and hence it helps you diversify your overall investment portfolio. Secondly, gold is a natural hedge against inflation. This will ensure that over a longer period of time, its real returns become quite competitive. Thirdly, unlike equities and mutual funds, in case of gold there is no invisible asset. The asset is tangible, standardized and measurable. By not including gold in your portfolio you lose out on these three key advantages.The crux of Javed’s argument was that is not possible to outperform by buying gold as there is no scope for outperformance within the asset class. However, allocating 7-10% of your portfolio to gold will give it greater stability and soundness.To cut a long story short, this is how gold can fit into your portfolio...• Focus more on gold bonds or gold ETFs rather than physical gold• Gold is a manager of your portfolio risk not an enhancer of portfolio returns• Gold holds value in turbulent times and that is its greatest meritIn a nutshell, as the world enters turbulent times, you may actually be taking a big risk by not including gold in your portfolio. It is time to give your portfolio that gilt edge.