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Why gold remains an all-weather investment choice

Vikram Dhawan, fund manager at Nippon India Mutual Fund joines Money Control to discuss how gold stacks up against other asset classes.

September 28, 2022 / 06:39 PM IST

Debates and discussions around the performance of gold, as an asset class, are as common among economists as they are among arm-chair investors. In the recent past the naysayers would find it hard to make an argument against the precious metal. “Gold has gone up by almost 70-80% in the last five years and almost doubled from the lows of 2016”, said Mr Dhawan. And yet he believes that based on its five to ten years historic performance, gold “still remains undervalued against most front-line assets like equity and other commodities with the exception of steel and silver”.

The gold run

It is important to understand what made gold stand out in the last few years as an asset class. The “gold run” started in 2016. The rally continued for the next two years buoyed by purchases by central banks. In 2020 global investments in the yellow metal grew on account of what Mr Dhawan calls the “pandemic hedge”. He cited that the scale of flows into gold ETF grew multifold during the peak of the pandemic and accounted for a fourth of the total consumption of gold annually.

But over time the pandemic hedge began to unwind. On the longer term basis though spikes and falls in gold investment do not affect the trajectory of gold prices because “eventually fundamentals take hold”, reckoned Mr Dhawan. “But since investment flows tend to be concentrated in smaller periods of time, they tend to amplify the price swings”.

Gold shines (again)

And despite all the overhang and headwinds, “this year gold has outperformed most front-line asset classes and I think if the outperformance continues for the rest of the year, you might see the tide turning in favour of gold as far as investment in gold is concerned”, he said.

How much is enough?

Among the most frequently asked questions is the amount of gold that should be allocated to an investment portfolio. Mr Dhawan recommended that the decision should be a function of the person’s “investment objective and time horizon”. If one’s portfolio is more skewed towards risky assets in the equity market, gold acts as a hedge. On the other hand, for investors who choose to park their savings in fixed deposits and debt instruments, gold averages out the performance especially during times of stress.

For those who would like to consider gold as an option to invest, said Mr Dhawan, “gold ETFs score over many other forms of gold”. One unit of gold ETF can be traded on the exchange which is equivalent to one gram. “It has been one of the best inventions in the financial sectors in the past two decades”, reckoned Mr Dhawan. Moreover, “when you are buying a gold ETF, you are actually getting a stake in high quality physical gold with high liquidity.”

And since gold has been around for centuries, a few years of price movements either way will not change the long term trajectory of this metal. “There’s a market which is orderly”, said Mr Dhawan. “There’s a pedigree”. For those who are still on the fence might want to consider this simple fact.

Moneycontrol journalists were not involved in the creation of the article.
Tags: #Features
first published: Sep 28, 2022 06:39 pm