Should gold be part of your long-term investment portfolio?

Published: July 9, 2015 at 12:29 pm

Last Updated on

Should gold be part of your long-term portfolio? Does it help to have some exposure for the sake of diversification?

This is the second part of “asset allocation for long-term goals”. The first part which considered only equity and debt, can be found here

This post was made possible, thank to Balaji Swaminathan. He got me the source of monthly gold price from June 1995 onwards.

Link:

http://www.indexmundi.com/commodities/?commodity=gold&months=240¤cy=inr

If google has got it, Balaji can find it. He is the most intelligent web searcher I know. Probably why he does not post questions at AIFW! Why ask, when you know what to look for!

Methodology

  • Franklin India Blue Chip is chosen as representative of equity
  • Franklin India Income fund as representative as debt.
  • These are among the oldest equity and debt funds in the market.
  • A monthly SIP from 6th July 1998 to 5th May 2014 was considered (too lazy to update)
  • The monthly gold price (per gram) was considered to be equal to the price on the NAV dates of the above funds. Have to make this approximation. Can’t be helped.
  • Two different asset allocations were considered: One with 60% equity and another with 70% equity.
  • The gold allocation in the above was varied from 0% to 40% or 30%. The rest is assumed to be in debt.
  • The variation in monthly XIRR  was calculated with the XIRR SIP tracker.
  • The standard deviation in the monthly XIRR variations was computed.
  • The final XIRR and the standard deviation are plotted for different gold exposures for 60% equity and 70% equity.

Equity exposure = 60%

The x-axis represents the exposure to gold.

gold-asset-allocation-2

 

Notice that with increase gold exposure, the XIRR increases (not by much, if you ask me) but the volatility (- standard deviation) also increases.  There is a minimum at 5% exposure.  It is worth the effort and stress especially when gold is riskier than stocks, is something for you to consider. No point in holding gold as far as I am concerned. Will just increase my stress.

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Equity exposure = 70%

The x-axis represents the exposure to gold.

gold-asset-allocation-1

 

The case of holding gold is much worse here.

Conclusion

Stay away from gold funds or gold etfs. Do you see articles in the media now, suggesting you buy gold, when the prices are lower from the peak of the crash?

Think for a moment as to why.  AMCs were busy pushing these products when gold prices looked liked it could never fall.  Now when there is sideways movement, no one is saying buy them.

Gold is supposedly a hedge against inflation. Not exactly in terms of price movement. When the economy collapses, then physical gold will perhaps serve as currency. I don’t think it has much value (other than social, religious, traditional etc.)  otherwise.

It is silly to stock up on physical gold and not focus on investing.  What kind of  physical gold should it be, is another question: jewels, gold bars etc.

Should I buy some physical gold each year to protect myself against economic collapse? Perhaps.  As long as it not part of my investment portfolio.

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M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Linkedin
Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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9 Comments

  1. There is an additional cost in keeping physical gold. To get a bank locker, every bank insists on a deposit, the amount varying with each bank. The deposit amount interest rate will not match the returns that mutual funds (barring gold type) may give over time.

  2. There is an additional cost in keeping physical gold. To get a bank locker, every bank insists on a deposit, the amount varying with each bank. The deposit amount interest rate will not match the returns that mutual funds (barring gold type) may give over time.

    1. there is no such rule…whoso ever tells u to open a account or put a FD tell him to provide a RBI circular …. i have fought and won……I have got a locker with a psu bank without any savings account/fd/insurance etc…only locker…use RTI if required to know waiting list etc…..
      further it is unfair to include cost of locker in “cost” of gold…as most of us (well….ok our parents….) already have it anyway…
      also if not already having a locker.. pls not that cost approx. rs1500/- pa is only 0.3% if gold value is 500000/-

      also as patttu ji has said..The cost is necessary evil.

  3. Dear Pattu,

    1) “If google has got, Balaji can find it. He is the most intelligent web searcher I know. Probably why he does not post questions at AIFW! Why ask, when you know what to look for!”- no truer words spoken.One has to chat with Balaji over Whatsapp and ask him suggestions for a product/service and lo and behold-in a matter of seconds one will have links to the most relevant and useful sites-have personally experienced it-simply amazing man 🙂

    2) Again lucky with my allocation to gold-it’s around 5%.Of course,it was not by any design but pure luck-did not know till I read your post that at around 5%,the volatility is the least 🙂

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