Gold prices showing volatility: Five rules to have gold in your portfolio without worrying

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Historically gold is seen as ‘stable’ asset class. However, there are times when the yellow metal prices turn volatile, like at present, which might make nervous. After hitting Rs 49,721 per 10 gram on June 1, 2021, the yellow metal has crashed to Rs 46,668 on June 18, 2021. Gold also exhibited very high volatility in CY2020. For the first eight months it went up and for the rest of the months it corrected. If you are a gold investor, big moves in prices may make you worry. Here are five rules on investing in the yellow metal that can help you manage your portfolio better.

1. Decide gold allocation

Decide how much you want to allocate to each of the asset classes – equity, bonds and gold. Gold does not offer any cash flow against bonds that pay interest or stocks that pay dividends. However, gold works as a hedge in volatile times. “Having exposure to gold is important for investors. Though it may not give big returns it provides stability to portfolios, along with debt investment,” Anil Rego, Founder and CEO, Right Horizons said.

Your allocation to gold should be based on your need for ‘portfolio insurance’. Typically one should have around 5-10 percent of total investments in gold. If your asset allocation allows you to buy more then you should. Otherwise it is better not to overexpose oneself to gold.

2. Rebalance your asset

Though you may have initiated investments in gold in line with your asset allocation needs, gold price will keep oscillating. You have to review your asset allocation from time to time. If your allocation to gold has gone down (due to big surge in stock prices), then it is a signal to add gold. However, if you are over-allocated to gold, then it is time to cut your exposure to gold.

This rule based approach will remove all anxiety in your money management drill. Keeping emotions at bay and following the ‘asset allocation map’ through asset rebalancing process at least once in a year will put you on course.

3. Do not speculate

Looking at the past returns, if you try to make money in gold by trading in it, there is a fair chance that you will lose your sleep and money too. Gold is a global tender. Its price gets decided by a host of factors that are difficult to comprehend. Putting money on gold basis past returns is not the best way to take exposure to gold. Ideally you should be a long-term investor in the yellow metal.

4. Prefer paper gold

Many times investors choose investments in physical gold. It is difficult to handle investments in physical gold. Each time you buy or sell the transaction costs have to be factored in. It is also troublesome to execute the transactions. Investments in gold ETF, gold saving funds and sovereign gold bonds depending on your investment needs can help you manage your investments better. “Sovereign Gold Bonds (SGBs) provide a good investment option for investors who have a low-risk appetite and a relatively higher rate of returns,” Ankit Agarwal, Managing Director, Alankit Ltd said.

5. Avoid leverage

Fierce moves in gold are especially painful if they are going against you when you are taking bets using borrowed funds. Avoid it altogether. If you are trading in gold using commodity futures or options and cannot manage risk, you are better off staying away from derivatives. Leverage typically amplifies outcomes – both positive and negative.