Lately, I have received a lot of queries from readers about Gold. Everyone seems to have woken up to the idea of investing in yellow metal. Many readers have read a lot about the latest trends in the global financial markets, and appear to be in full concurrence with the idea of structural decline in the relevance of USD as global reserve currency; however the views about the rise of EUR or CNY as alternative reserve currencies do not seem to be sanguine. This uncertainty about the future of the global financial system is probably driving the interest of investors towards gold, which has traditionally been a popular reserve currency and preferred store of value during crisis period particularly.
Many readers have highlighted that it was perhaps a mistake on my part to cut allocation to gold in my portfolio. I would like to answer the queries and concerns of the readers herein below.
First of all, I would like to remind the inquisitors that it has been my consistent stand in past three decades of my investing life that in my view gold being mostly an unproductive asset, having little industrial use, does not qualify to be an “investment” grade product. Given its popularity and general acceptance in global financial system, it does qualify to be a decent alternative to the paper currency. It therefore does well with the rising inflationary expectations and negative real rate environment. I therefore use it more as a tactical shift from cash & bonds; and sometime as an opportunistic trade. I never use it as a permanent asset class in my asset allocation. Incidentally, my wife and daughters are also not fond of gold; so there is no conflict on this issue at least!
In my investment strategy update for 2020 in December, I had stated- “In view of the adverse risk reward ratio and growing divergence between bond and equity yields, I shall scale back my strategic equity allocation to 50% from 60% presently. The strategic asset allocation now stands at 50% Equity; 25% Gold and 25% Debt.”
However, as the news of COVID-19 outbreak from China spread and global markets started to take note of the crisis in February I revised my asset allocation to sell the tactical allocation to gold and upgrade equities to overweight . Incidentally, markets tanked in March affording me an opportunity to make the shift at favorable prices.
In April after the global economy went into a lockdown, I made a big call, increasing the equity allocation further , I maintained my equity overweight stance on asset allocation and increased equity allocation further to 70% from the previous 65%, cutting the debt allocation from 30% to 25%. The overweight stance on IT, Pharma and chemical (including agro chemical) was adequately emphasized.
I am pleased to note that the strategy has worked out well so far. Since the recent bottom of the market recorded on 24 March, IT sector has returned 61%; Pharma sector has returned 57%; Nifty is up 48%, S&P500 is up 41% and gold is higher by 29%. The chemical sector has also outperformed the benchmark Nifty and gold comfortably. Average IT sector mutual fund return has been 35% (absolute) in past 3 months.
I therefore do not see much point in this brouhaha over gold, and would prefer to continue with my strategy for some more time, till I see indications of an imminent and material correction in the equity prices.