As gold prices scale record highs, investors should consider profit-taking if the metal has grown to an outsized share of their overall portfolio. In the last one year, the metal has gained 53% as compared with less than 1% in Nifty.
Domestic gold prices hit an all-time high of Rs 1,12,750 per 10 grams this week in line with strong global trends. Experts say gold prices appear stretched in the near term and could see some cooling.
Retail profit-taking has happened —people selling old jewellery to cash in on high prices, with plans to buy back later if prices dip, says a research note by Axis Mutual Fund says The decision to book profits depends on the form of investment.
Jewellery is rarely used as a trading asset, so most holders should ignore short-term fluctuations. “For investors in financial instruments like gold exchange traded funds (ETFs) or futures, limited profit-taking can make sense,” says Anindya Banerjee, head, Commodity and Currency Research, Kotak Securities.
Stagger buying
Gold prices have risen at the fastest pace since 1979 in rupee terms and have outperformed benchmark equity indices like the Nifty and Sensex on a total return basis across short, medium, and long horizons. Investing in gold is a time-tested portfolio diversifier and is an ideal store of value in the long term.
Given the sharp rally in gold prices, investors should adopt a long-term view and use a staggered buying approach. They should invest gradually over time and use price pullbacks to accumulate, with the goal of positioning for a potentially sustained upward trend in gold prices.
“Core allocations to gold should be preserved, as they play a vital role in diversifying risk and stabilising returns across market cycles,” says Banerjee.
Investors should not think of gold as a quick trade. They should look at the metal as a way to diversify their portfolio rather than trying to chase short-term gains.
Rishabh Nahar, partner, Qode Advisors PMS, says the best approach is to build gold exposure gradually. “Instruments like gold exchange traded funds or sovereign gold bonds are better than rushing to buy a large quantity of physical gold at one go,” he says.
ETFs, gold bonds
Individuals should consider gold ETFs or sovereign gold bonds (SGBs) in the secondary market to invest in the metal. Gold ETFs trade on exchanges just like stocks, ensuring better liquidity compared to SGBs, where some tranches see very little activity in the secondary market.
Unlike SGBs, ETFs do not have a lock-in period and investors can enter and exit at any time, making them more flexible for short- and medium-term investors. While SGBs do offer attractive tax benefits if held to maturity, ETFs provide simplicity, ease of access, and continuous pricing, which makes them the preferred choice for most investors.
The government has stopped issuing fresh tranches of sovereign gold bonds since last financial year. At present, SGBs trade at a significant premium of 10%-15% of the market price. “If investors want to go with it, they have to make sure that 2.5% interest over the remaining tenure would compensate for trading costs and price premium,” says Karan Aggarwal, co-founder, Elever, a quant based PMS portfolio manager.
For SGBs, the capital gains on redemption at maturity are tax-free, a unique advantage over other forms of gold investment.