Read Time: 3 minutes
First, congratulations on owning the yellow metal! Gold has had a dream run over the last couple of years—delivering a 33% return in one year and a 22% annualized return in two years (49% cumulatively). This leads us to the question: What should one do with their gold now?
For the first time in seven years, we have turned ‘cautious’ on the yellow metal. Here’s why:
1. Understanding gold’s return profile:
Unlike fixed income instruments, gold does not have coupons, making it difficult to predict its return profile. Historically, we expected a 6-8% annualized return based on:
- Supply–demand mismatch of 3-4%
- Rupee depreciation of 3-4%
For Sovereign Gold Bonds (SGBs), an additional 2.5-3% of coupon payment takes the return profile to an 8.5-11% annualized return. The long-term return profile has also remained within this range.
2. Gold’s role in a portfolio:
Gold has always served as a hedge or insurance against Indian equities. It was never intended for returns but rather for protection. It provided anti-fragility to the portfolio, with returns being just a by-product.
3. The contrarian nature of gold allocation:
Gold allocation has always been inversely proportional to market sentiment.
- Bearish? More allocation to gold
- Optimistic? Less allocation to gold
Allocation has varied between 3-10% of a portfolio, based on this outlook.
What should one do now?
1. Rebalance – Book profits in gold, reinvest in equities:
Gold’s role as an insurance to Indian equities has worked. In the past 6 months, the large cap index has fallen 10%, while gold is up 20%—resulting in a divergence of 30%. When insurance is available, one should use it. Converting some gold to buy Indian equities is a prudent move.
2. Enjoy the windfall:
Gold has delivered three times the expected return in the past one year. Use the bonanza—spend on a vacation, an outing with family and friends, buy art—or anything that soothes your soul! And if none of these appeal to you, then buy equities.
3. Silver – A potential catch-up play:
Typically, silver tends to catch up with gold, and its underperformance can be filled in 6 months. However, the conviction in return convergence is not so strong. That said, silver has done well in both one and two-year time frames, with 34% and 21% annualized returns respectively.
Should one exit gold entirely?
The allocation can be brought back to strategic levels or one can go marginally underweight. Though geo-political tensions are expected to ease, growing de-dollarization and increasing central bank buying are likely to keep gold prices buoyant. Additionally, if inflation persists and bond yields don’t spike, gold will be a beneficiary.
Interestingly, Bitcoin which was considered ‘digital gold’ is not living to its moniker. Hence, investors can partly exit the position, not completely. Global analysts who have called for gold to touch USD 3000/oz are now calling for USD 3500/oz.
As history shows, all-time highs can persist longer than we can remain sane!
Returns: Gold, Silver ETFs & Nifty50 Index
Key Takeaway:
Opportunities this clear, don’t come very often—this is one such instance. Book profit in gold and reinvest in equities!
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