Should you Invest in Gold?

Written by The RupeeManager Team

Sunday, 01 January 2012 19:12

Few people knew about Gold as an investment a few years ago. But the Gold run has changed all that. Everybody is now including Gold investment as part of their portfolio. But then we saw a sharp decline in gold prices of close to 20% since the peak in September, 2011. And now we have reports on Gold: The End of the Bubble

Now, this adds to the confusion of a layman investor. While there are reports of the end of the Gold run, there are experts who believe that gold investments still holds value at present prices.

Quantum Mutual Fund believes that the decline in gold prices presents an opportunity even if in the interim, to increase allocation to gold. It is also possible that gold prices fall further and hence investors can use such opportunities to reach their desired allocation levels.

Here’s the analysis that they share on their website: Some pointers:

A number of reasons such as the increase in Dollar, liquidation to fund losses in other assets / meet redemptions and severe slow down in physical demand are being ascribed to this fall in gold.

We believe that the liquidity argument is contributing to the decline in gold prices since at present; liquidity is the focus of the market.

Also, the demand for Treasury securities that mature in under a year have increased as financial institutions boost holdings of the highest-quality assets to meet new regulations set by the Bank for International Settlements in Basel, Switzerland.

With the heightened emphasis on stronger liquidity positions for financial institutions around the world, we’ve seen an increase in the regulatory demand for liquid assets, but we’re not necessarily seeing an increase in the supply of liquid assets.

In addition, people are hoarding cash because they see that the U.S. Dollar is having trouble funding the market as banks shed Euro-denominated assets.

There were increased talks that the Commercial banks were meeting their Dollar liquidity requirements by leasing gold to facilitate these loans at lower interest rates.

Yes, all these reasons do help us infer gold’s recent decline, if not completely.

We believe that the recent fall in gold is probably more due to lack of catalysts that could have helped push it to record highs. In simple words, it is a move towards a more rational behavior despite the ongoing crisis.

We’ve been used to seeing monetary interventions by central banks through monetary infusions to resolve the underlying issues and attempts to promote growth in such uncertain times. But this time, the market forces have pressured central banks to not bow down to such ill conceived notions.

The reluctance of central banks (although forced) to avoid further easing measures have in the short term removed the catalysts for gold prices to increase further.

Central banks continue to run into deficits, as there is no plan around cutting public spending which is a worrying issue. It’s likely that these market forces can only sustain until the deflationary forces remain subdued or the crisis doesn’t further intensify. On any of these signs, the trigger to print money at full capacity would be immediately in force.

Watch patiently until these criticalities in the eyes of policy makers wear off.

Earlier in this article, we had mentioned about market forces demanding a more rational decision-making at the center. The Fed’s earlier attempts at rounds of Quantitative Easing or money printing were highly criticized, as they have not aided the problem at hand.

We reiterate that it is highly likely that policy makers would switch on their monetary infusion engines at the first signs of growing deflationary threat, liquidity tightness or it may be a contagion triggered by European debt woes.

Conclusion: It's a difficult thing to understand all the Economics jargon and their implications for a layman investor. A good thumb rule would be to allocate 10-15% of your monthly investments into gold. And once you do that, keep reviewing every quarter. And remember not to worry too much!

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