Gold at Rs 44,000: Time to sell or buy more?

The record rout in the stock market has spared no one. No portfolio is immune to the coronavirus-induced bloodbath on Dalal Street, aggravated by a sharp drop in global oil prices. However, if you are an investor with decent exposure to gold, you do have reasons to smile. The yellow metal has been on a rising spree for a couple of months with investors sitting on a profit of over 12 per cent so far this year. If experts are to be believed, it may go as high as Rs 54,000-55,000, a surge of more than 25 per cent from the current levels. Gold is negatively correlated to equities. It performs exceptionally well during stock market crashes such as the ones happened during dotcom bubble in 2000 or global financial crisis in 2008 and now due to pandemic coronavirus.

So, should you stay invested to participate in the expected rally or book profits? There are no easy answers. On Friday, 24-carat gold in New Delhi was trading at Rs 43,460 per 10 gram. It touched a high of Rs 45,000 earlier this month. However, it is on track to post its biggest weekly drop in nearly seven years as a rout in global markets forced investors to cover margin calls. "There is a lot of panic in the market and even safe haven assets are getting ditched to cover losses in the wipe-out. Broader trend on Comex could be $1,570-1,610 and on domestic front prices could hover in the range of Rs 41,300-42,200," says Navneet Damani, VP - Commodities Research, Motilal Oswal Financial Services.

We tell you how you should navigate through these times:

Should you sell at current levels?

If you are invested in gold, its allocation in your portfolio would have gone beyond the consensus recommendation of 10 per cent in the recent rally. "In such cases, it makes sense to sell some gold and buy equities to rebalance back to your original asset allocation," says Gaurav Rastogi, Founder & CEO, Kuvera.in, an online platform for mutual fund investments.

Prathamesh Mallya, Chief Analyst Non Agri Commodities and Currencies, Angel Broking agrees. "Those who have purchased their gold at lower price should ideally sell their holdings at current market price of around Rs 43,000/10 per gram," he says.

However, there are few holding a divergent view. IndiaNivesh does not recommend selling gold it this juncture when global economy is facing a recession, US 10-year bond yields have reached to record lows, global crude oil prices are struggling, global financial institutions are in trouble and global equity markets are facing a panic selloff. The brokerage expects gold to consolidate in the price range of Rs 42,000-45,000 in the medium term and sees it testing Rs 54,000-55,000 levels over the next two years.

"Global investors are finding way to invest in safe haven assets and due to this US bond yields are struggling and Japanese yen is getting strength. We will not recommend to sell gold in the current scenario. We suggest to keep at-least 20 per cent of asset allocation in the form of gold. It can either be via sovereign gold bonds, gold ETFs or gold coins," he says.

Meanwhile, global central banks are hinting at further rate cuts that may lead to a currency war. The rupee already hit a fresh record low of 74.48 against the US dollar on Friday. If you are among those who often deal in international currencies whether for business or personal purposes such as education, medical treatment or travel needs, you may consider maintaining the gold exposure to hedge against rupee devaluation.

"World central banks are reducing interest rates faster than expected and bond yields are falling steeply. To keep up demand in economy central banks will resorts to currency printing and quantitative easing. It may trigger a forex war. Safe haven assets such as gold and other precious metals will do well in these uncertain times," says Narinder Wadhwa, President CPAI and CMD Ski group.

Ultimately, everything boils down to asset allocation. "The bottomline is to maintain an allocation of 5-10 per cent in gold and invest any profits on liquidating gold in equity," suggests CS Sudheer, Founder and CEO at IndianMoney.com.

Should you go on a buying spree?

The medium to long-term view on gold prices indeed remains bullish as investors are looking for flight towards safety. "We have already touched high price points in the Indian markets, and any appreciation of 10-15 per cent from the current market price of around Rs 43,000on gold can't be ruled out," says Prathamesh Mallya, Chief Analyst Non Agri Commodities and Currencies, Angel Broking.

Wadhwa of CPAI agrees. "The monthly gold chart at present is technically bullish and suggests the outlook for gold in the year 2020 is for more of the same-trending sideways to higher in the coming months."'

However, you should avoid going whole hog on the yellow metal. Kuvera.in recently conducted a study on portfolio allocation between gold and equities between 1990 and 2019. The allocation of equity-gold was made in the ratio of 90:10, 80:20, 70:30 and 50:50. The Nifty 50 was used as a proxy for equity returns. The 90:10 equity to gold split gave an average annualised return of 16.2 per cent, while it was 14 per cent for the 50:50 equity to gold split. The study, thus, shows higher allocation to equities fetch you better returns than having equal exposure to gold and equity.

That said, if you already have necessary allocation to the yellow metal, you should avoid buying more at the current levels. "Gold prices have shot up over the last two months and have hit fresh highs of Rs 45,000, but in 2012, after crossing Rs 30,000 per 10 grams, the metal was flat for seven years. Equity markets on the other hand surged after 2014," points out Sudheer of IndianMoney.com.

In a nutshell, if you prefer safety over high returns, gold is the way out as an excess allocation to the yellow metal will protect you from volatility, but you would have to compromise on the returns.

How to invest in gold?

Indians have an emotional relationship with gold. Selling gold is considered inauspicious and is done only if a family is facing acute financial distress. That said, you should avoid buying physical gold for investment purpose and instead choose gold bonds, mutual funds, ETFs or digital gold. These instruments not only give you liquidity, you can also convert it to physical gold if need be. Sovereign gold bond, in fact, gives 2.5 per cent fixed annual interest and is also free from long term capital gains. There are options to start SIPs in gold mutual funds and gold ETFs. This way you can invest steadily and accumulate units over the long-term. You will require a demat account to invest in gold ETFs, but not in mutual funds. However, expense ratio could be high in gold MFs.

"You can invest in gold ETFs/gold funds for financial goals like children's wedding or retirement planning. You can sell units anytime you want, which ensures high liquidity. Conversion to physical gold is also possible when investments exceed a particular size and can be done close to the financial goal. You can buy more gold compared to the same amount on physical gold as you save on costs/making charges. Redeem gold ETFs closer to the wedding and buy gold jewellery for children as per fashion trends," suggests Sudgeer of Indianmoney.com.

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