Gold has fallen 30% from its highs of $ 1920.30 and any fall below 20% gets categorized as a bear market. The last week witnessed a sharp drop on concerns of countries like Cyprus trying to liquidate its gold holdings to fund its bailout package. The legendary investor George Soros also cut his holdings in SPDR Gold Trust, by a whopping 55% last quarter. SPDR is the world’s largest exchange traded gold fund. All this could make any investor in gold quite unsure of his next move.
Should you buy more now that the prices have softened, hold your existing investment or sell your investments? Before making any decision, two important things to be taken into account are the fundamentals of gold in the days to come and your investment horizon.
First, let’s look at the fundamentals of gold
The demand story: Demand for gold comes in from many quarters, main ones being the investments in ETFs, jewelry and for industrial usage. With the fall in prices, what would be he impact on these factors? Gold as an investment found flavor globally, because of weakening economic scenario. The yellow metal provided an insurance against the fall of other classes of assets like equities etc. However, as US economy showed signs of recovery, investments in gold ETFs have come down. Higher prices also pinched the pockets of industrial and jewelry users and the usage reduced. With prices receding, the users of gold should be seen making some purchases. It is said that increased purchases in this category should be able to make up for losses seen in the investment front.
Action by Central Banks: Gold is held as a reserve by many central banks. The US greenback lost its value in the recent past forcing many banks to channel their holding towards gold, as one of its foreign currency reserves. Cyprus was forced to liquidate a small amount of its gold reserve to finance its bailout package. Many countries like Portugal, Ireland, and Greece etc may also follow suit, if required. The recent drop was a result of action by Cyprus, accordingly prices may see a further slide if any more countries take this route.
The rupee factor: Indian gold investors have an additional factor to worry about, the value of rupee in comparison to the dollar. The Indian Rupee has fallen to the level of Rs 53 levels, increasing the cost of buying gold. At the same time, those holding gold may see higher returns. The percentage of fall in dollar and rupee terms may not be same all the time due to the interplay of rupee.
After assessing the fundamentals of the metal, now evaluate how well it suits your investment criteria. Always have a time horizon for your investment.
Gold may have been a part of your portfolio for various reasons. It could be as a hedge against a fall in prices of other assets, as an investment for jewelry for special purpose, for speculation or as a hedge against inflation. Investment for any reason needs to be with a time horizon.
For anyone with a speculative outlook for a short term and a profit-booking motive, the time may be ripe for selling and booking profits, provided you invested at the right time. However, someone with a longer horizon need not make this move. Anyone investing with a disciplined approach and a longer horizon, phases of downtrend may, in fact help in bringing the overall cost down. Any asset class will have periods of ups and downs and this presents an excellent opportunity for cost averaging.
Also take a decision on the total amount of gold in your portfolio. Having an excess allocation towards gold will cause an imbalance in the returns, in case of events like the current one. Gold should ideally act, as insurance and allocation towards insurance ideally should not be more than 10% of the portfolio value. Hence, make small allocation towards gold, so that it provides succor in times of distress in other assets.
If you are looking to accumulate gold for some special occasion like your children’s wedding etc, you can definitely continue your purchases. If the wedding is somewhere around the corner, then needless to say, you can go ahead and make some purchases. In fact consistent buying in gold since the drop has already brought back the prices to above $1400 levels.
Mode of investments also matters, while e-gold and ETFs may prove to be tax friendly. Investments in physical gold like bars or coins comes in with its own set of risks, like storage and security, making charges when converted into jewelry or its resale value.
As in any other asset class, diversification and consistency is the key. Ad hoc investments would not bring in any significant results and may fail at times too. Do not be swayed by the rumors or negative sentiments floating around and keep up your investments.