Should gold be a part of your investment portfolio ?

Our love for gold is not today’s fad. Since very long time, we are using gold for many different reason. With time the reason for love of gold is changing. Some may say it is now lower as the financial asserts are now available. So the question is…

The generally accepted formula (100- Age) just ignored gold. What it all telling you is simple. Deduct your age from 100. Whatever the answer is, is your expected allotion to equity. Remaining is (though not directly mentioned) but debt. That is Deposits, Money market and debt market securities. Atleast I don’t found anyone who is telling me that this portion in the formula is gold. Yes. Some adviser advised that keeping 2-5% of your portfolio in gold is good. But you can hold many other assets in that like Gems and Jewelry, Land, Art, some type of alcohol or Real Estate, which is also present in many investors portfolio. Thanks to REIT. So why gold and is there any special reason why you need to keep gold and if yes in which format? Like Physical gold, stocks of gold mining or trading company, ETF, Paper Gold or Gold bonds which are issued by Some govt or any other format.

Relationship of Gold with other asset classes and Currency.

  • Gold price and Dollar holds Strong negative relationship. If dollar index is strong and going up, Gold is supposed to go down.
  • Naturally Gold and Inflation holds positive relationship. In fact it is called traditional hedge for inflation. But first check this
  • Historical evidence are very interesting when it come to interest rate and Gold Price. Investopedia once again come to help

long-term review of the respective paths and trends of interest rates and gold prices reveals that no such relationship actually exists. The correlation between interest rates and the price of gold over the past half century, from 1970 to 2015, has only been about 28%, which is considered to be not much of a significant correlation at all.

Study of the massive bull market in gold that occurred during the 1970s reveals that gold’s run-up to its all-time high price of the 20th century happened right when interest rates were high and rapidly rising.

Read more: The Effect of Fed Fund Rate Hikes on Gold |

  • When it come to stocks market like Indices Dow Jones, Sensex, S&P 500, CAC Dax, FTSE it shows that, it is mostly negative relationship.
  • Gold Price is also helpful in determine weather Crude is Cheaper or Expensive.
  • Gold is also used to check what central banks are doing with their reserves. Simple ratio ( Gold / total reserve ) if if studied in time series can tell many things.

Industrial Use of gold

  • Biggest Demand for Gold is for Jewelry. India and China are very big consumers. But recently while talking with many ladies, of course they are millennials , mentioned that they don’t like gold. So though I was reading that in year 2010 the 51 demand of gold is from jewelry, right now I believe that this is going to change at least in India. Don’t know about China.
  • IT hardware industry use gold. You can make money by buying iPhone scrap, or by buying Telecommunications tower related machinery as gold is used in manufacturing some part of it. How much, depends on many factor. One calculation will tell you that one cell phone hold 50 milligrams of gold. So with one simple calculation, you can understand that only cellphone industry, ignoring tower, used $500 million worth gold in one year.

Hmm. Yes. Its true.

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  • There are very few chemicals which react with pure gold. It make gold as favorite for many business.
  • First book about Dentistry came around 1530, suggests use of gold for filling cavities in teeth with gold leaf. But it was used since older than that. Reason is gold is bio compatible. You can keep it near your body and there is no harm. Ancient Chinese and Indian medicinal practices also use it as medicine for many different reason. Still today, it used in treatment in arthritis. Took 22 weeks but make big relief.

Gold as Part of your Portfolio.

Here we come to real subject. Though nearly everything is mentioned in Investopedia tweet, but still is it good to keep it in your portfolio in 2017? A simple Question. Why someone will add one asset called gold in the portfolio? The answer is for keeping the value locked which is correctly mentioned in Investopedia article.

When asked will he having gold in his portfolio or will he buying gold or having it right now, Utkarsh Jain, Chief Learning Officer FinTree Education answer

I wouldn’t want to put my money on gold at this moment. I don’t see a significant upside from the current levels and definitely not a long term investment option , even as a part of AI component of the portfolio

Yes. Agreed. Check few tweets and comments on the subject.

Lakshmi Iyer, CIO -Debt, Kotak AMC and A BALASUBRAMANIAN answer on question.

Yes. Not only FED but many other Banks are taking decision about it. May be we are not going in low rate region anytime soon.

But what about strategic asset allocation? Will you keep it in your portfolio?

If not Gold then what?

Till the point it is clear that gold is not an investment. It is hedge against inflation, keeping your wealth stored or basically consumable in the form of jewelry. Gold is simple to understand. Buy Gold or any other financial assets which are tracking price of gold like Gold ETF. Futures and Options are not that much simple and now used for speculation also. Not Everyone can take position on exchange. OTC contracts hold their own risk.

Equity may went to bear market and will not give any return. Debt is holding its own characteristic properties. It is also not immune for inflation. Here I remembered one statement of Utkarsh Jain. While answering question, he mentioned, I will think about gold only if the world is coming to an end.

Defiantly that is not going to happen anytime soon.

So what is the answer?

Wide public says they will not INVEST in gold. Is gold investment? No. Gold is not investment. Gold is a hedge. In many cases, there is hardly any need to keep gold. You may think about buying ring for your wife or husband or some other jewelry. In very rare cases where inflation was sky high. But still people found other ways to keep transactions going. There are some people who love gold may say it is commodity and you need to keep it in portfolio. While checking their argument, I found one Example, with which I want to close it.

MRF or Madras Rubber Factory, manufacturer of Tyres. Just assume that you bought Share of MRF ten years back and Invested same amount in Rubber plantation.

I am damn sure that today investment value of MRF is far more than Rubber plantation.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter