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Friday, November 14, 2014

Gold - Do not Reduce Your Exposure

Gold - Don't Reduce Your Exposure





The yellow metal's poor run since 2013 has left investors wondering if they should reduce or eliminate their exposure. That would be a mistake.

 

The past two years have been black swans in the history of gold. The metal gave negative returns in 2013 and this year is not expected to be any different (see graphic). Investors who binged on the yellow metal when prices were making new highs on a weekly basis in 2012 have been badly bruised.

What you should do:

Experts advise that investors should not allocate more than 5-10% of their portfolio to gold. They also say that one should rebalance the portfolio to maintain this allocation. Whenever there is a change in value in any part of your portfolio, you should rebalance. When prices (of any asset) are falling, you should buy.

WILL BEAR RUN LAST LONG?

Investors fear that after a decade long bull run, the bear run in gold may be equally prolonged. Gupta doesn't think so. To day markets have turned dynamic, so you can't rely on historical patterns. While gold may decline or move sideways for a couple of years, it should do well thereafter. Gold's production cost of $1,050-1,100 per ounce sets a floor below which it can't decline.

What you should do:

Exiting gold at this stage when its price has come down significantly would be a mistake. In fact, some see this as an opportunity. If your gold purchases are tied to a goal, such as your daughter's marriage, then declining prices work to your advantage. But most experts are also not very bullish about the prospects in the near term. Stagger your purchases to gain from further declines.

Avoid buying jewellery when you wish to invest in gold. When you go to sell jewellery, you will immediately lose 30% of its value--about 20% to making charges and another 10-12% on account of purity issues. Gold ETFs are a more cost-effective option. They are liquid and have no security or purity issues.

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