BT Insight: Gold prices at record high of Rs 48,980; should you buy, hold or exit?

Gold at Rs 50,000 per 10 gram does not look distant. The prices have been registering a new high every other day. On Wednesday, it hit a fresh high of Rs 48,980 per 10 gram as per the AM price given by India Bullion and Jewellers Association. In just six months, the prices have risen by 25 per cent, a significant jump for an asset class in such a short span.

"In Q1 of FY21, the spot gold prices posted gains, rallying almost 13 per cent and multi-year high of $1779.06 in June. Taking cues from firmness in international markets, MCX Gold also witnessed gains of almost 12 per cent in Q1FY21 and hit its life-time high of Rs 48,589/10 gms in June," said Rahul Gupta, Head of Research - Currency, Emkay Global Financial Services.

People who have missed the rally are wondering if they should invest now. Many investors with good exposure to the yellow metal are pondering over liquidating and locking in some gains. We tell you what you can do in the current situation:

Factors working behind the gold rally

Many factors are contributing to fuel this unhindered rise in the prices. "Gold surged to its highest in nearly eight years on Tuesday as mounting fears of a resurgence of new coronavirus cases kept safe-haven demand for gold alive, setting the precious metal on path for its biggest quarterly gain since March 2016," says Navneet Damani, VP - Commodities Research, Motilal Oswal Financial Services.

Gold has traditionally been the most preferred save haven in the times of uncertainties. "The fears of rapid coronavirus and its impact on global growth and rising geopolitical tensions between India-China, US-China and US-European Union have increased the demand for gold. Moreover, rise in crude oil prices and hike in gold ETFs holdings, provided support to gold prices," says Gupta of Emkay Global Financial Services.

Even though more and more countries are relaxing the restriction the price rise has continued unabated. "Positive US consumer confidence number also could not dampen gold's rally. Uncertainties around the Hong Kong issue and the second wave of COVID-19 has created distress in the market, supporting precious metal prices. US Treasury Secretary Steven Mnuchin and Fed Governor Powell pledged to do more for the US economy as it battles the enormous fallout from the virus outbreak," says Damani of Motilal Oswal Financial Services.

Will the gold prices rise in future?

With 25 per cent rise having already registered since the beginning of 2020, is there still a chance for gold prices to go further up? "Today market participants will focus on PMI numbers from major economies globally and private payroll numbers from the US which will give a hint on the situation of jobs market in the country. Broader trend on COMEX could be in the range of $1775-1805 and on domestic front prices could hover in the range of Rs 48,550-49,200," says Damani.

While many believe that the chances of further rise are limited, some are of the view that there are good chances of further rise. "Going ahead, any escalation in the ongoing geopolitical tensions or any negative news regarding coronavirus will boost safe-haven demand for gold and once it crosses and sustains above Rs 48,600, we can expect a surge towards Rs 49,750-50,600. Meanwhile, dips will find buying support until Rs 47,000 holds and prices will again bounce back towards 48,600 levels," said Gupta of Emkay Global Financial Services said.

So, further rise in prices cannot be ruled out, however, it would be difficult to match the performance of last six months.

What should you do with gold?

While it is easier to get swayed by the rising prices, personal finance experts advise some caution with gold investments. If you do not have gold in your portfolio or you have been underweight on it then you may add it. "Traditionally gold has been perceived as a hedge against inflation. It is considered as a safe-haven asset and its value assumes more importance during the recession. An investment in gold can act as a shield against volatility. If an investor wants to invest, he must do so after considering his risk appetite. The falling interest rates also make gold an attractive investment proposition," says Abhinav Angirish, Founder, Investonline.in.

However, if you are planning to buy gold at the current level it would be better to have lower expectation and long term horizon. "Investors can still look at investing in gold although the rate of returns would not be as lucrative as it has been in the past one year. The investment in gold should be done for two purposes - as an asset allocation and diversification, and to get good returns in these uncertain times," says Col Sanjeev Govila (Retd), a SEBI-registered investment advisor.

If you have significant exposure in gold, it is time for you to liquidate and lock in some gains. "Gold provides diversification against other asset classes such as equity, debt and real estate. There is a place for gold in one's portfolio, however, one should not have too much exposure in it at any given time. If someone already has higher exposure, they should bring it down in line with the asset allocation. Ideally, exposure to gold should not be more than 5-10 per cent of the total portfolio," says Rishad Manekia, Founder & MD, Kairos Capital Private Limited, a Mumbai-based financial planning firm.

If your portfolio allocation of gold has risen due to this price surge, it may make sense for you to liquidate it in part to bring it to the desired allocation. "Irrespective of returns and market conditions, one should maintain consistent asset allocation over time. If an asset like gold has outperformed, it is prudent to book a little bit of profit and bring the exposure back in line with your asset allocation strategy. Rebalancing of a portfolio should be done at least once a year to come back to ideal asset allocation and ensure consistency over time," adds Manekia.

The best way to invest in gold

Experts advise against investment in gold in physical form. "For investment purposes, physical gold is considered unattractive due to high buying and selling cost and risk of theft. Besides, the purity remains a concern while buying physical gold. Investors should consider investing in paper gold as it is much safer and more liquid," says Angirish of Investonline.in.

One of the best investments to get biggest advantage of gold investment is sovereign gold bond. "SGB is essentially a very long-term commitment of five-eight years - if money can be invested for this period, then it is superior to all other gold investment avenues due to additional 2.5 per cent rate of interest that it pays apart from being pegged to the price of Gold," says Col Govila.

However, if you are not sure about liquidity and may need funds midway then gold ETF could be a better option. "Gold ETF has an edge over physical gold in terms of costs. Gold ETFs are advisable for small investors due to the transparency involved in buying and selling. Besides ease of trade, they also offer tax benefits since the gold ETFs that are older than a year attract long-term capital gains," says Angirish of Investonline.in.

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