Existing investors must book partial profits in gold to cut portfolio risks

Gold has been rallying for the last one year. Investors who have become overweight on the yellow metal (see their original allocation of 10–15 percent) should periodically book a partial profit and bring their allocation back to the original level. Allocating themselves to be overweight on the yellow metal will increase the level of risk in their portfolio. Whenever the bulls move in gold, their portfolios will gain great momentum if they allow themselves to fall prey to heavy weight.

Most experts today are of the view that the rally in gold will continue. Chirag Mehta, senior investment manager, Quantum Mutual Fund, senior fund manager, says, “The world’s GDP growth is expected to decline this year and it cannot reverse very quickly. “Such an economic environment is positive for gold as well as the ultimate safe-haven.” In addition, central banks have cut interest rates and may reduce them further in the future. Worldwide real interest rates are low or negative. Typically, there is a negative relationship between gold and real interest rates. Lower real interest rates support the gold price, making bonds less attractive to hold.

There has been a lot of demand destruction in economies around the world. Governments are expected to support both families and businesses and thus prevent demand from collapsing. “Governments will issue treasury bills and central banks will buy them. Government financial losses and expansion of printing of funds by central banks will cause currency depreciation, which will support the price of gold, ”says Kishore Narne, Associate Director and Head of Commodities and Currency, Motilal Oswal Financial Services.

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The US dollar is currently strengthening, but experts believe the trend is unlikely to last. Mehta says, “Because of the deficit and debt that America has today, the dollar cannot remain strong.” In addition, in an environment where equity, debt and real estate are unlikely to perform, gold can also benefit from Tina (there is no alternative option).

Some factors may slow down the gold rally, although they are unlikely to change its direction. “Central banks bought 658 tonnes of gold in 2019 – the second largest gold in the last 50 years. They are the major buyers in the market for the last two years. This year, many central banks may sell some of their gold stakes to support their economies. This can slow down the pace of the rally, ”says Naren.

If there is panic due to the epidemic, in that case the speed of sleeping may also slow down. Ketan Kothari, director of gold refiner and bullion producer Ketamon, says, “As the epidemic peaks in many countries, which are now slowly opening up for trade, gold prices may not rise as before.” According to him, many people can sell gold even at current high levels to take care of their other financial needs, and this can also affect the momentum of the rally.

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After the recent high of gold Rs 47,327 per 10 grams on MCX, some profit booking is likely. “An improvement of 8-10% from the recent all-time high would be a good level for new investors to invest in yellow metal,” says Roopak Dey, Senior Research Analyst, IIFL Securities. Alternatively, they should build their allocation over the next 6–12 months by purchasing on reforms.

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