Time to increase gold allocation in your portfolio this Dussehra

Unlike the past few years, this Dussehra can be slightly better for your gold investment. Rising oil prices and risks in the global economy can help investors get better returns on gold. The upside, however, will be capped.

In the past one week alone, the yellow metal gained 2 per cent in the domestic market, and 0.4 per cent in the international market after Italy increased its budget deficit target to 2.5 per cent of gross domestic product. It led to a fall in the euro against the dollar, and investors resorted to gold, a safe haven.

While many events should lead to a rally in gold, there are also other factors that would limit the price rise. The US and China are at trade war, but both countries are set to hold high-level talks to reduce the spiralling trade and military tensions between the two. The oil price is rising, which can cause inflation rates in the US to go up. But the country has now become one of the largest oil producers in the world. The US economy also continues to do well, keeping the dollar stable.

The positives and negatives for gold have kept analysts guessing on its price movement in the future. They, however, feel there is going to be a small rally as the effect of the trade war and rising oil prices slowly start showing in the global economy. “We expect that lack of global cues could keep volatility low for gold but on the domestic bourses, prices could continue to gain on the weakness of the rupee. The expectation is that inflation could remain unchanged in September and that could keep the volatility for gold,” says Navneet Damani, associate vice-president, Motilal Oswal Financial Services.

Damani says in the short to medium term, the trade war impact will gradually start catching up on gold and trigger a rally. The upside could extend towards $1,260-1,270 internationally, while that on the domestic bourses will extend towards Rs 32,200. “A sideways-to-positive move will be seen as long as price holds above support of Rs 30,700-30,900,” says Damani.

Gnanasekar Thiagarajan, director at Commtrendz Research, points out the effect of the trade war has surfacing showing as the data shows US job growth slowed more than expected last month. “For domestic investors, the downside is limited as the dollar remains strong. Investors will see a rally. But a clear picture will emerge in December after the US Federal Reserve meets and gives an outlook on further interest rate hikes,” says Thiagarajan.

Analysts say investors should increase their exposure to gold up to 10 per cent of their portfolio, depending on their comfort with a two-year horizon. But buy on dips, considering that gold prices could hold steady around Rs 30,700 levels. One way you may hold gold for the long term is via sovereign gold bonds. They pay an interest rate of 2.5 per cent annually on the initial purchase price but suffer from a lack of liquidity. The government will repurchase these bonds from investors only after five years, and they trade at a discount in the secondary market. Gold mutual funds offer liquidity, but you will have to pay an annual expense ratio (0.4-1.2 per cent). Avoid investing in physical gold or deposit schemes run by jewellers.

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