Gold is a pretty useless metal. Of all the gold that has ever been mined in the history of earth, only 10% has ever been used industrially. Yet no one has ever regretted buying the metal.
For thousands of years starting way back in 5000 BC to present times, gold has found a place in worship, love, promise and store of value within societies.
Even though gold was always considered precious, it’s only about 2,500 years ago that gold was used as currency. Around 50 BC, Romans set the price of one pound of gold to 42 coins.
Fast forward to the 1800s the Coinage Act of 1799 set one dollar to be 24.75 grains of gold in the US, which is about 1.6 gram. That means 10 gram of gold would have been $8 dollars instead of $1,800 ongoing price.
Implying, with a meagre 2.5% inflation over 220 years, the value of the dollar has deflated by 225x. The world has seen gold as currency, then gold backed paper currency and now currency that buys gold. Gold is rare, paper is not.
One of the things that make gold rare is that it is hard to extract. Mining for gold is expensive and uses chemicals that are poisonous to humans. Perhaps that’s why, there is an element of reverence all feel about gold.
The same can be seen in asset allocation as well. Gold is almost a no regret asset class. Gold is treated as a reserve that hedges portfolios against inflation, volatility, currency depreciation.It is often used for its easy portability of wealth across generations and time horizons. If you have a 2-3 year horizon, we think gold is likely to do very well from here.
We are bullish on gold for 2023. First, some large central banks are experimenting with expiry linked digital currency supply which forces people to spend benefits handout instead of saving it.
This might lead to further upside pressure on consumption spurring up the economy but also inflation. This might lead to people finding ways to save using precious metals which are expiry free.
Secondly, India tops global gold consumption.With resumption of large weddings, sale and gifting of gold will drive consumption as before.
Thirdly, there is a certain amount of mean reversion gold will experience towards historical prices.
Finally, with the collapse of crypto currency as an alternate store of value, gold still remains the most compact way to store and transport wealth. Its value is established crossborder instantly.
Getting exposure through sovereign gold bonds is best if you can lock your money till maturity as trading liquidity is very poor in case you want to get out midway.
For liquid and tactical exposure, gold ETFs are most promising. Another way is to buy into the equity of companies that benefit from a positive gold outlook.
Companies that produce mining equipment, chemicals for gold mining can be a proxy exposure using equity. Jewellers and exporters of finished gold products is also an interesting currency hedge as its revenues are mostly export driven.
Even gold loan companies that benefit from increasing collateral coverage as gold price increases will be immune to defaults.
We do recommend changing your gold allocation tactically. You may design a portfolio of sovereign gold bonds, gold ETF and gold related equity that can work as your allocation needs towards gold.
This in combination with your remaining portfolio can enhance your risk adjusted return and also make your wealth journey more aligned to your risk profile.
(The author is Founder, CEO at Lotusdew)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)