It was not too long ago when we saw a mammoth fall in gold prices. Heavy selling by various gold funds and institutional investors triggered the steep fall in gold prices globally.
However, the tumbling rupee has reversed the trend in gold price. With the rupee having breached Rs 68 to the US dollar, gold prices seem to have spiraled out of control. As global economic crises continues to intensify, their central banks on a money printing binge and Indian government deters gold imports, the precious metal has once again climbed to record levels.
Is this the demand for a safe haven asset or short term speculation on the commodity that is driving gold prices? As per article in Economic Times, gold price is expected to breach Rs 35,000 per 10 grams within a week's time. Thus speculators are losing no time in highlighting the short term opportunity. While we would not want to confirm or reject the same, we believe that buying gold as a natural hedge is good enough for one's portfolio. As with other asset classes, over exposure to the metal for near term gains would be very risky.
Gold has long been considered as a natural hedge against inflation, other than this the major reason for buying gold is its safe haven status. This is because; it can be exchanged for any good or service in this universe. Over and above, the rate at which currencies are being printed, there is a strong possibility that gold will maintain its real value and buy more goods and services down the line than paper money.
At Equitymaster, our view on gold has never been determined by short term price outlook. And thus our views are not based on short term gains. Instead we believe that gold is a must have insurance for one's long term portfolio. The risks of currency devaluation and inflation make the need for this asset class all the more pronounced.
Further, it is also important to understand that not all assets move in the same direction during the same time period. If at a particular time equities are witnessing a bear market, it is unlikely that other asset classes like gold, real estate, debt instruments will be witnessing the same trend. Hence it is best to invest in more than one type of instrument to improve your chances of achieving your long-term goals with minimal loss.
In our view, as the global macroeconomic headwinds are still prevailing, the golden days for gold are still not over. Therefore investors would do well to hold gold as a small percentage of their portfolios. And, if your portfolio does not have small part of investment in gold it still isn't too late to do the same.