How Can Gold Play A Fundamental Role For Indian Investment Portfolio???

How can gold play a fundamental role for Indian Investment portfolio???
Gold is perceived with different meanings by Indian investors. Some venture gold as a safe
investment avenue and some use it for adornment. Gold is preferred buying in volatile market
conditions against the uncertainty. As soon as there appears a downturn in the economic
environment, the investors accumulate more of gold as an asset class or they sell when they see the
economy is in recession and there are some who patiently sit and watch the trend. It is seen as a
strategic asset by the Indian investors and it plays a rudimentary role in their investment portfolio.
Gold has its history to tell that it is quite an integral asset and hence even today there are many
hopes, aspirations and sentiments attached to this yellow metal, since many years ago. The intrinsic
qualities of gold and its scarcity makes it unique and necessary for the Indian investors to hold in
their portfolios. Gold was found with natural intrinsic qualities as it was the only metal that do not
corrode like other metals like iron, lead, copper, aluminium. Gold can be melted over a flame making
easier to design various kinds of jewelleries from it. Gold was hence historically recognised
worldwide in the form of coins stamped with a seal for the exchange of goods. The rationale behind
acquiring gold dates back to Indus Valley civilization where people wore jewellery some 4000 years
ago. Gold can also be traced back to the two Hindu epics Ramayana and Mahabharata in which the
kings used and wore gold as a mark of power, prestige and wealth. The first gold coins were issued
widely during the Gupta dynasty around 250 AD. Interestingly, this period was also known as the
Golden Age. On the face of it, every emperor issued coins to accentuate the significance of his rule.
However, in 1962 post India China war, the Indian foreign reserves had been depleted. Then, under
the finance ministry of Morarji Desai, an Act was formed to revive the precious foreign exchange
reserves. The Government of India established Gold Control Act to mandate the conversion of
private gold bullion into gold jewellery and declare the unaccounted wealth in the form of coins and
bars to authorities and the citizens were banned from trading gold with each other. Due to the ban
on gold, the demand for gold remained as ever and hence the value of gold soared high compared to
other commodities and the rupee and finally India became the net importer of gold.
The gold still carries a significant role in today’s society. Comprehending the global risks like
uncertain geopolitics, political and economic conditions, IMF’s and the central banks hold gold as
reserve asset as a hedge or a shield to meet their core objectives like safety, liquidity and long term
returns. Central banks owned 34000 tonnes of gold making it the 3 rd largest reserve asset in the
world.
Now that we know that gold plays an elemental role in Indian investors’ portfolio. Here is - Why??
1. Gold mitigates political and economic uncertainties and hence act as a hedge against rising
inflation and fraudulent businesses. When the economy collapses, the gold can turn to be
the liquid asset with no credit risk. Gold can be liquidated or realised by the investors to
meet short term needs. When the inflation rises, the rupee depreciates and the gold
appreciates creating more value for the investors.
2. Gold is also a source of long term returns. As long as the nation’s wealth increases, the
demand for gold both as an investment and physical gold grows perpetuating its worth.
Therefore, substantial economic development can improve the investors’ base of gold as an
asset.
3. Gold is used by the investors to diversify their portfolios because even in the rapid sell offs in
the economy, the supply of gold remains stable and steady because the gold is less volatile
compared to stocks in the downturns of the economy. This encourages the Indian investors
to lean over the gold as the safe asset class. Gold may not grow in a large proportion like
stock indices and commodities but it is certain that it will keep the investors away from
losing out the value.
4. Gold investors have reaped slightly better returns than investors in stock market this decade
(2010-2020). BSE Sensex has appreciated by 130% in the last 10 years, but gold has outdone
it with 134% returns. Gold was sold at a price of Rs 18,500 per 10 grams in April 2010. A
decade later, as the retail price for the yellow metal has risen to over Rs 45,000 mark. Gold
delivered negative returns in three out of the last ten calendar years. For three consecutive
years 2013, 2014 and 2015 gold gave negative returns of -4.9%, -8.2% and -6.2% respectively
to investors. In the remaining seven years, gold delivered returns ranging between 5.2% in
2017 to 31.7% in 2011.
How much of the gold should we own??

Now the question is, how much percentage of our portfolio should consist of gold? According to the
top analysts, just 5 to 10% of our investment portfolio should consist of gold for risk diversification.
Investing in gold beyond 10% in a general opinion can become a risky affair and one must diversify
by putting the savings into better alternatives that give higher returns thereby maintaining a
balanced portfolio. From consumer’s perspective, holding physical gold as an investment is a BIG
NO! Jewellery is usually bought as gifts for weddings or just for ornamental purposes in India. On
buying jewellery, he loses 10 to 30 % in making charges plus authenticity remains a concern too. By
the time he sells it, he loses further 10 to 30% more on purity of gold and making charges again. So
the investor barely gets a profit on selling the physical gold compared to its actual purchase value.
The value of physical gold erodes over time. The ideal way to invest in gold could be in Gold
Exchange traded funds, gold coins, bars, Sovereign Gold bonds issued by the Government of India.
Gold coins and bars are physical gold bought from jewellers or banks that can attract premium. On
the other hand, gold ETF’s are paper gold that are traded in stock exchange and the value of
investment in Gold ETF’s reflects the value of underlying asset, i.e, gold. Similarly Gold bonds are
also paper gold which can be sold at gains exempted at maturity plus it fetches an interest rate of
2.5% p.a.
Have we assessed the impact of gold on our Indian economy??
After importing oil, India has the second largest import bill coming from gold imports. The rising
purchases of gold from foreign dealers add more to India’s import bill and results in India’s current
account into a deficit. We also roughly consume 1/3 rd of the global supply of gold. With the rising
current account deficit to GDP, the rupee depreciates, key imports become expensive. Being an
importer, the strength of the Indian rupee loses in rupee terms and the gold prices begin to surge
because now we need more money to buy the same quantity of gold. This becomes riskier for Indian
economy as a whole. However it is not easy to curtail the purchasing of gold to reduce the import bill
since the demand for gold in India is way above the gold supply. But as the FICCI report suggests that
the gold can be reused/recycled that is already present in the country like other many countries
where the mined domestic production is low. This way the gold in circulation can add more
economic value to our country, add employment and bring up the domestic jewellery industry and
hence mobilise the gold effectively within the country. According to FICCI stats, the Indian gold
industry contributes directly $30 billion to our country and provide employment to 2.5 million
people already.
So, what is driving Gold now??
Amidst the widespread of coronavirus disease across the globe has adversely impacted the risk
appetite of investors due to which real estate and stock markets are losing out on money and prefer
to lean on gold as the safe asset class. The gold spot prices hence have surged by 2% to 46200 mark
and Gold future prices have also leaped up by 1% to 43000 mark as on April 13th, 2020. Besides this,
the extreme volatility in the markets, demand associated with traditions, rise in inflation, supply and
demand of gold, monetary policy, currency movements, buying into gold backed ETF’s, bonds, coins
and uncertainty in markets drive the gold prices.
Final thoughts
Being a liquid asset, holding gold whether it’s in the form of ETFs, or as bars and coins provides
flexibility to individuals, institutional investors and central banks since it can be quickly realised in
times of need.

How Can Gold Play A Fundamental Role For Indian Investment Portfolio???

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How much of the gold should we own??

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