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Is it time to transfer your gains from gold to equities?

Sun May 17 2020


Gold has been the best performing asset class over the past year with a return of around 50%. The investment demand for the yellow metal has gone up lately as people move to risk-averse assets and exiting risky ones such as equities amid the covid-19 crisis. This may have also led to change in asset allocation with portfolios becoming gold-heavy. However, there are fears that when the lockdown opens up across economies, the rally in gold may come to a halt. Renu Yadav asked experts if it makes sense to transfer the gains from gold to equities, while the latter segment is still way below its peak.


Anirudha Taparia, Executive director, IIFL Wealth and Asset Management


Move from gold to the extent it has exceeded ideal allocation


Wealth management is about astute asset allocation to ensure wealth preservation. Gold’s appeal as a ‘safe haven’ has made it an investment of choice during periods of heightened uncertainty perpetuated by economic or political turmoil.


However, gold, for most of our clients, is a small percentage component, which is maintained as a safety hedge rather than as an instrument to enhance returns. Gold outperformed equity last year. In fact both gold and sovereign debt outperformed in the 2008-2009 global financial crisis as well. If the weightage of gold in your portfolio has increased beyond the ideal asset allocation limit suited for you, it would be ideal to shift to equities and debt.


This again should be based on an investor’s downside tolerance. Even in equities you need to invest within the asset allocation limits and book gains at higher levels and invest in other asset classes such as debt or gold depending on risk appetite. Investors should create portfolios with minimal risk for the short term and for the long term to maintain equity at levels where you can comfortably tolerate volatility.


Kartik Jhaveri, Founder and director, Transcend Consulting

You should not shift gains in one go, but in a phased manner


The answer is both yes and no. It is always a good idea to create wealth from equities. However, it is also prudent to invest in equities in a staggered manner. Systematic investment is one of the best devices available.


The time of crisis for equities has not ended and just because gold has delivered 40% returns does not mean you move capital or profits or both from gold to equity immediately. A phased manner is a better idea. With the crisis far from over, there is a significant possibility that gold continues its upward journey. So, therefore, stay invested in gold and slowly move funds into equity.


Moreover, as the rupee is a weak currency compared with the US dollar ₹1,000 invested in gold 10 years ago is likely ₹1,600 now. A gain of ₹600 over 10 years implies a return of around 6% per year, which is near about the rate of inflation. Therefore, remember that gold on an average will give returns linked to inflation. So, as and when the markets correct violently that may be the time to move larger chunks of your money from gold to equity. That way you are ready for the next rally in equities.


Ashish Shanker, Head of investments, Motilal Oswal Private Wealth Management

Don’t keep more than 5- 15% gold in your portfolio


Gold is considered as a reliable portfolio diversifier since it has the ability to act as a hedge in several difficult situations such as economic downturn, geopolitical tension, currency depreciation and inflation.


In the current scenario, due to the uncertainty on how much damage the covid–19 pandemic would have on the economy and steady investment demand for gold, investing in the yellow metal still makes sense. Also, having a low co-relation with other asset classes, gold deserves an allocation to the tune of 5- 15% in the overall portfolio in accordance with investors’ risk profile. If the investors’ allocation towards gold is beyond the mentioned range, then it can be gradually switched to equities over a period of six to 12 months.


A portfolio allocated across various asset classes such as equity, fixed-income and gold helps weather the storm more effectively than a portfolio, which is skewed more towards a particular asset class. Thus, the idea is to own both asset classes (in this case gold and equities), according to the risk-return profile.


Veena Malgaonkar, Certified financial planner


Outlook is still bullish, so no reason to move out of gold yet


The yellow metal is seen as a hedge against inflation, but investing in it requires a bit of timing. In the global markets, gold first hit $1,900 per ounce in August 2011, and it still hasn’t reached that level. Of course, in that period, the rupee has weakened from ₹45 to around ₹75 currently. We had asked our clients to have at least 10% gold in their portfolios in April 2018 when the prices were around ₹30,000. Prices have now gone up 50% and we are still not thinking of booking profits and are keeping around 20% gold in the portfolio.


Global economies are printing money. The US Federal Reserve has indicated that they will do whatever it takes to support the economy. That is likely to push the dollar lower which, in turn, will benefit gold, as it is used to store value. With interest rates around zero for many countries, the fact that there is no income received on gold does not matter. Gold normally moves on fear, recession and when there is uncertainty with respect to the economic front. Two out of the three are prevalent currently and, hence, there is no reason to get out of gold yet.