There may be various views on whether to recommend gold or not at this stage – now that’s its close to its life time highs. Some say the best is yet to come, others say caution is warranted at life time highs. I am personally a strong believer of Gold as an investment class and one should have 15-20% of its investment portfolio in Gold. Gold in the last 2 years have given tremendous returns and it is an instrument which works wonders in an inflationary environment.

I came across an article on Gold wherein Nilesh Shah ‘CEO of ICICI MF’ has given his views and it is worth sharing.

Every Indian household collects gold over several years for use in the marriage of their children – particularly their daughters. What better way of collecting gold over 10-15 years than starting the equivalent of a SIP in a Gold ETF for your daughter. There is no dispute with people who say that when an asset class has reached an all time high level, you need to be far more careful investing into it. Which is why if you are investing in gold today, we need to be more careful than ever before. Gold has given almost equity kind of returns over last couple of years. There are a couple of reasons for this performance.

1. Uncertainty and volatility
The world has seen a lot of uncertainty and volatility in the last couple of years – and has risen substantially as a result of a lot of money going into gold in uncertain times. But, at the same time we should also remember that gold even in 80’s was trading at 800$ an ounce those days. If we compare on a long term picture, gold has not really delivered a great return. If we divide the basic structure of gold, gold is store of value. It is said that a piece of gold what it would have got in 15, or 16th or 17th or 18th century, even in 20th and 21st century we are able to buy the same thing. So it has not appreciated or depreciated against inflation – it has delivered inflation return by way of storing value.

So gold needs to be looked at as that part of your wealth which will not depreciate or appreciate against inflation, it will maintain itself against inflation. So that is the positioning of gold in a portfolio, it helps you to manage your purchasing power.

2. Demand-supply situation
In 80″s gold traded at 800$ an ounce, because of the supply shock of oil. Thereafter Paul Volcker pushed up US interest rates to 14% level on a ten year US treasury to break the back of inflation – but in the process it also broke the back of gold, because people said that if US treasury gives 14% return and US is going to control inflation, I will put all my money there rather than in gold. And that process forced investors and central bankers around the world, to keep on selling gold. The only buyer of gold was essentially the consumer of gold, which was generally for jewellery or industrial purpose. This cycle kept on going on and on for next 25 years and somewhere when US treasury yields came down to near zero levels a few years ago, the reverse happened. People started selling the US treasury and buying into gold. So this is the second phase that has occurred in gold’s life cycle in the last 25 to 30 years. So, the demand side appears strong right now. If you look at the supply side, whatever gold which was easily extractable in the mines, has been extracted and one has to go deeper and deeper and dig for gold. Kolar gold mines were producing gold in India sometime back. Today they are not producing any gold, or the quantum of gold
The second source of supply was the continuous selling by Central Banks over the years – which has come down dramatically now because now they are favoring gold vis-à-vis other assets like treasury bonds and their ability to liquidate gold has also come down dramatically, because they have already
sold fair amount of gold. So supply of gold from central bankers has come to an end. And infact some of the central bankers like India and Russia have actually started buying gold. If China which is sitting on 200 trillion dollars of reserve, decides to allocate a small portion to gold, that will make a significant impact on gold prices. So Central Banks activity is also supportive of gold prices going
higher rather than lower.

The third thing that is coming is purely from the consumption demand of gold. Wealthy Chinese, Indian, Japanese, Middle East investors and consumers are buying gold. In China, the Government really tracks everything and the deposit rates are really subdued. Now if you buy gold, one you get exchange protection, and two, you also get some sort of privacy from Government and their all pervasive eyes. So, these factors are making more Chinese investors buy gold.
So, you have a situation where demand is increasing and supply is contracting. So all those thing put together, we believe that gold is something which will give you storage of value, the demand-supply balance is still in favour of demand, central bankers activities are also supporting gold prices on the higher side and keeping all these things in view, gold provides an attractive opportunity for investment.
Now we also have to take a future call on gold. The future call on gold is essentially coming from the fact that the world is printing lot of currency, lot of money, in order to come out of financial crisis -and all these printing of money will make the environment inflationary in nature and one product that always does well during inflationary environment is gold. Fixed income will not do well in inflationary environment; equities could for a while underperform in an inflationary environment. But gold is something which will always do well in an inflationary environment. So even from a futuristic point of view, keeping in mind the higher money supply and the expected inflation, gold provides good storage of value, so all these three things points towards the fact that yes one can be bullish on gold
notwithstanding the fact that we are at or close to an all time high for gold.

In most families especially the middle income group and the trader community – the better halves are already running gold schemes with the local jewellers. Every month they give money and even without the husband realizing that money keeps on getting accumulated in a road side jewelers shop. 1. You don’t know either he will be there or not after one year. 2. You don’t know whether he will give you 24 carat gold or not, 3. And even if he remains and if he is going to give you 24 carat gold, you still end up losing one year’s interest. So somewhere that allocation towards gold which is happening out of the wife’s or the better halves part of the kitty should be brought into the mainstream through gold ETFs. To them this is a much better investment because here the existence is not in doubt, quality is not in doubt and you don’t lose out on interest.

To summarise, Gold investment in India is a tradition and people will always invest in Gold irrespective of the price. It is at this hour of the decade that we realise the importance of gold investment and want to do a planned investment in this asset class. Invest in GOLD- you will feel safe than sorry.