In gold we trust! – Part 2: How much to invest?

In my earlier post, I evaluated gold as one of the recommended investment options in the present global economic situation. It would be worthwhile taking a look at some more hard facts before we move to questions like – How much to invest? In what forms to invest?

In the recent months, a tiny country like Vietnam has doubled it’s appetite for gold as compared to last year. It has been tipped to have surpassed even India! Why? One wonders. But look little carefully & there is a fact that probably explains this phenomenon – rising inflation! The current rate of inflation in this tiny nation is 25%. As I mentioned in my last article, inflation, interest rate & demand for gold seem to have shown close interrelationship yet again!

Gold has returned slightly higher than it’s 1980 peak of > $ 900 per OZ. When you look at stock markets from 1980 most have more than doubled. More so in the emerging economies. Even looking at the levels after present battering, the global stock markets are easily sitting at more than double the levels as compared to 1980’s. By this comparison, gold remains the grossly undervalued investment option as compared to stocks, real estate, crude oil etc.

Again does this all point us – the average investor with average risk posture – to having gold-heavy investment portfolio? Again - Absolutely not! Not even in the current inflationary & somewhat recessionary trend! There are a few reasons for this:

First, gold is uniquely positioned – as a commodity as well as store of value. While it is great as store of value & in some occasions, a trusted medium of exchange (world’s central banks hold around 12% to 15% of their reserves in gold), gold is not a directly consumable commodity, except for the industrial usage.

Second, the rules of diversification apply to any investment option including gold. “All eggs in one basket”… While we are witnessing a general slowdown, I firmly believe that India growth story is not complete yet. The present situation (political & economic) may throw some more nasty blows in next 2-3 years & the growth rate may see further dip; however Indian economy is expected to find it’s original growth trajectory eventually. Diversification continues to be a fundamental reality of good investment strategy.

For an investor with average risk appetite, I would recommend keeping gold exposure of 5% to 20% of their periodic investments; depending on the opportunities presented & economic conditions. In the current situation of inflation, rising interest rates (India) and slowdown in growth, 10% to 15% of one’s periodic investment to be put in gold, seems logical to me.

Now let’s turn to the part 3 of my gold series to know my views on the recommended forms of gold investment.