Hold 10% gold in your portfolio for support as equities may see correction

Gold gave a return of 13.59 per cent in the international market in 2017. This was its best performance since 2011, when it had given a return of 10.06 per cent. Its trailing one-year return currently stands at 10.48 per cent. Its return in the Indian market in 2017 was more muted at 5.34 per cent. Given the elevated valuations in the equity markets, and the expected liquidity tightening by global central banks, investors should take exposure to gold, since it could provide support to their portfolios in case equities witness a correction.

Gold was performing well in the international markets until August. Thereafter, increased expectations of a rate hike in the US and optimism about Trump's tax reforms caused a paring of its gains. Equities and commodities did well last year owing to the high level of liquidity infused by central banks. In such circumstances, gold normally tends to underperform. Nonetheless, it performed reasonably well in 2017. "Last year the dollar corrected sharply against a basket of currencies, such as the euro and the British pound. That helped gold do well. In addition, there were geopolitical factors like North Korea," says Pritam Kumar Patnaik, business head-commodities, Reliance Commodities.

While the rise in the international market was 13.59 per cent last year, it was only 5.34 per cent in the Indian market. This differential in return arose primarily on account of the dollar-rupee movement, with the rupee strengthening against the dollar last year.

Experts say that they don't see much downside for gold from current levels($1,320 per ounce). It may not perform too well in the first half this year, but could gather momentum in the second half. "Owing to the euphoria surrounding the US tax cuts, gold may not perform well in the first half of the year. But this year we are likely to see lower liquidity from central banks. The Fed will reduce the size of its balance sheet. The European Central Bank will also reduce its bond purchases, leading to lower liquidity support for the markets. In that scenario, equity markets may come under pressure. When that happens gold can be expected to do better," says Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management Company. Patnaik says that in the US, when interest rates are hiked, the economy often tips into a recession. "If that happens again, it will enhance the safe-haven demand for gold," he says. A further weakening of the dollar against the euro could also lend support to the price of gold in the international market.

As for the geopolitical scenario, the stand-off between the US and North Korea flares up periodically and then subsides. "The geopolitical scenario may limit the downside for gold, but is unlikely to be a major factor in driving its price up," says Mehta. Patnaik, on the other hand, believes that the Jerusalem issue has opened up a can of worms. If it flares up, it could provide impetus to gold. 

On the flip side, if the rupee continues to strengthen against the dollar, that could once again mute the yellow metal's performance in the domestic market.

Normally the money that does not go into the equity markets goes into gold. But last year a lot of that money got diverted into bitcoin. But with this cryptocurrency witnessing a sharp correction, many investors are expected to exit it after having had a taste of its volatility. The money exiting bitcoin could find its way into gold. 

Investors should hold at least 10 per cent of their portfolio in gold. It acts as a hedge against inflation. It will also help diversify your portfolio, and act as a ballast in case the equity markets retreat from their current elevated levels. Buy the yellow metal on dips with at least a 5-10 year horizon. Currently the best way to hold gold is via sovereign gold bonds. Apart from capital gains, they also give 2.5 per cent interest annually.

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