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Shimmer And Shine

Gold should be part of a disciplined asset allocation strategy, writes Anirudha Bose

Gold investments have lost some of their sheen over the past five years. With the domestic price of gold de-growing by 1.52 per cent per annum on a CAGR basis, Gold ETFs and gold funds operated by asset management companies have fared even worse than physical gold itself.

Unlike metals such as copper and silver, factors that influence gold prices are more complex. Political and economic instability drive up gold prices, as does inflation. “In the last few years, the overall demand for gold has been muted. This is due to broad economic outperformance, coupled with controlled inflation,” says S. Sridharan of Wealth Ladder.

Before you jump the gun and dump your gold holdings, note that a multitude of factors are pointing to a potential recovery for the yellow metal in 2018. Experts foresee a good year ahead for gold.

First, we have got burgeoning crude prices. The World Bank recently forecasted that oil would rise to $56 a barrel in 2018 from an average of $53 in 2017. Rising crude prices tend to result in higher inflation; a key positive influencer of gold prices. We are also seeing a liquidity tightening stance from most global central banks. The US Fed, for one, raised its key rate thrice this year — the last one taking place recently on 13 December. This hawkish stance is likely to carry on and lend a further fillip to gold prices in 2018. Lastly, we have got the potential ‘black swan’ scenario of a geopolitical crisis on the cards. Although this is a low probability event, it would send stock prices plummeting and gold prices skyrocketing if it were to manifest.

“North Korea’s misadventure and the US’s response may drive gold prices higher in 2018. Investors tend to move money into safe assets such as gold during elections, military attacks and macroeconomic crises,” says Brijesh Parikh of Planet Wealth.Your strategy for 2018: With the Nifty already having risen nearly 25 per cent in 2017, you are likely sitting on profits if equities were part of your asset allocation. It would be a prudent move to book some of these gains and consider a portfolio allocation of 10-15 per cent to gold at this stage. Gold investments should not be made as a speculative move, but rather as part of a disciplined asset allocation strategy.

Stay away from physical gold. Instead, take an exposure to the yellow metal using one of the several gold-linked financial assets. Sridharan advises clients to invest using ETFs. “Liquidity in ETFs is immediate. Therefore, ETFs would be the right way to invest,” he says. Parikh prefers the SGB (sovereign gold bond) route. “They not only appreciate in sync with gold prices, but also earn additional returns,” says Parikh. Go for ETFs if liquidity is a concern and if you plan to make a tactical play for 2018. If your holding period is 5-8 years, buy SGBs. Either way, it would be a wise move to sprinkle some gold dust on your investment portfolio in 2018.

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