Keep 15% of your asset portfolio in gold ETFs

December 16, 2019 3:49 AM

One should invest in gold through exchange traded funds and hold with a long-term investment horizon.

As per the WGC report, there will be two significant factors influencing the Indian gold demand in the long run.

By Jimmy A. Patel

India, the second-largest consumer of gold in the world, has lately witnessed a dip in demand, reports the World Gold Council (WGC). Despite the full fervour of festivities, the demand for gold in the consumer segment fell due to the elevated pricing for the third quarter. However, in the recent past, gold demand in India spurred due to strong global gold prices, weak rupee, and some buying abetted by above-normal monsoon (nearly two-third of India’s gold demand comes from the rural areas, where agriculture is the main source of livelihood).

Plus, amidst the economic slowdown and liquidity crunch, people have approached gold as a store of value; a lender of last resort in times of economic uncertainty. Gold has always been a mark of wealth, carrying immense value across the globe. Hence recognising the risk involved, most of the central banks have been purchasing gold as part of their reserve management.

Further, it is vital to note that the lower and accommodative policy/interest rate environment is proving supportive for the precious yellow metal and turning the spotlights on gold. There has been a surge in global ETF inflows. Holdings in gold-backed ETFs hit an all-time high of 2,855.3 tonnes in Q3, as investments in global products grew by 258.2tonnes – the highest level of quarterly inflows since Q1 2016, reveals the WGC.

Even in India, certain investors have been investing in the Gold ETF as displayed by the increasing trend in folios and Asset Under Management (AUM) over the last few months according to the AMFI data. Smart investors are paying heed to the fact that global uncertainty has increased, there is a synchronised slowdown in global growth, trade war tensions, geopolitical tensions, etc., and are buying gold the smart way—through gold ETFs.

The WGC is of the view that the positive catalysts will remain going forward as well—particularly due to the financial market uncertainty.

Will gold move further up in India?

As per the WGC report, there will be two significant factors influencing the Indian gold demand in the long run. One, rising income—which is the most significant factor having a positive effect; and second, higher gold prices—which has a negative effect. However, the WGC report also states that weaker economic growth and the possible impact of higher gold price volatility may result in softer consumer demand this year, especially in emerging markets that make up the lion’s share of annual demand.

The physical gold demand in India, the WGC observes, would face increasingly competitive threats from other mainstream investment opportunities. That being said, the heightened global uncertainty and headwinds at play will prevail, and owning gold will help as a store of value during economic uncertainty, as a safe haven, and a shield against inflation in the long run.

Gold will prove to be an effective portfolio diversifier and the spotlight will continue to be on the precious yellow metal. So, consider allocating up to 10-15% of your entire investment portfolio to gold via gold ETFs and hold with a long-term investment horizon. Lastly, avoid a speculative approach while investing in gold.

(The writer is MD & CEO, Quantum Mutual Fund)

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