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Should you join the Gold rush?

Everybody seems to be bitten by the gold bug, but is gold really as good an investment as we assume

For Gold to find a strategic place in an investor's portfolio, it must not be viewed solely as a hedge against inflation. Because frankly, though it has had its moments, its track record is spotty. Gold has had an amazing run over the last seven years, earning returns of about 300 per cent. But even at the current prices, gold on international prices has gained at an average 4 per cent per year over the last 100 years. If adjusted for inflation, this is a mere 0.6 per cent a year. Besides, one should not view gold as a substitute for equities.

Let's give it some perspective. On January 2, 1992, the Sensex closed at 1,969.16, while the price of gold was $350.90. On January 2, 2008, the Sensex closed at 20,465.30 while the price of gold was $846.75. So over a period of 16 years, the Sensex would have given an absolute return of 839.29 per cent, while the same for gold would have been 141.30 per cent.

Hence investing in gold must be considered a valuable tactical asset. The global financial crisis, the weak dollar and galloping oil prices have provided gold the fuel it needed for its stellar ascent. And since gold is highly susceptible to geopolitical factors, at times of economic turbulence (as what is being witnessed globally now) and currency upheavals, it could turn out to be a very useful asset to hedge risk due to its low correlation with other major asset classes. So its function must essentially be to add diversity across the risk spectrum.

While, exchange traded funds (Gold ETFs) are the closest you can get to buying physical gold, buying gold mining stocks is another option to incorporate gold in your portfolio, though the myriad costs of running a global mining operation could get in the way. Risks related to gold stocks include exploration risks, risk of the depletion of reserves, decline in the production and mounting production costs which could eat into profits (and the stock price).

So when you do invest in gold, make sure that it is a calculated move and not the latest bug that has bitten everyone. And finally, please limit it to a very small allocation of your overall portfolio.