Natural calamities have the possible to trigger enormous financial and small business losses, and brief-term stock market place corrections frequently stick to. Hence, professionals say a terrific method to safeguard one’s investment portfolio against financial downturns could be to allocate a particular percentage of the portfolio to gold.
Anup Bansal, Chief Investment Officer, Scripbox, says, “Gold, as an asset class, is a hedge against inflation and provides diversification when equities are not doing well. It is not a consistent performer on a year-on-year basis. It also does not have cash flows like equity and debt assets. That said, historically, gold has proven to have a store of value.”
Markets may possibly be impacted in the brief term, but they will not stay unfavorable for a quite extended time unless it is an intense world-war like scenario. In a downturn – irrespective of whether due to financial cycles or all-natural calamities – equity markets have a tendency to turn about in the latter half. Hence, it is not advisable to raise one’s allocation to gold beyond the prescribed limit just due to all-natural calamities.
Experts say valuable metals like gold have repeatedly established to be a protected haven in instances of financial downturns. Looking at all-natural calamities down the previous, stocks and equity indices have reacted negatively which gave impetus to investor demand for gold. For instance, following the disastrous Sichuan earthquake of May 2008, gold costs had risen almost 10.74 per cent by July 15th. On the other hand, the S&P 500 tanked 13.44 per cent in the course of the exact same period.
Having stated so, Arshad Fahoum, Chief Product Officer, Market Pulse Technologies, says, “Over longer time-horizons such as 15 years or higher, returns in gold investments have historically fallen short in comparison to equity benchmark indices. Thus, it would be best to increase one’s gold investments immediately after the occurrence of a natural calamity and eventually reduce his/her positions in the precious metal to reinvest in equities, once the economy shows signs of stability.”
While allocating, about 10—15 per cent of one’s all round investment portfolio to gold is a superior practice as a safeguard against financial downturns.
Fahoum of Market Pulse says, “A better answer to this question can be sought by asking oneself two simple questions: what is the investor’s risk profile and, what is the state of the economy?” He additional adds, “A risk-averse investor who prioritizes portfolio stability over portfolio appreciation can allocate a higher percentage to gold. Besides the probability of a natural calamity, if the economy is headed downwards or driven by stagnancy, adding to one’s gold positions could be a better alternative.”
However, sector professionals say if the economy reflects a sturdy development trajectory, investing in equity instruments could be more profitable.
Ashraf Rizvi, Founder – CEO, Digital Swiss Gold and Gilded, says “For those fortunate enough to manage a larger portfolio, the investment in gold is subjective to the investors’ risk appetite and asset mix, not just purchasing power. While investing in gold, one should ensure that they weigh their investment in gold against all other assets in their portfolio and not just equities.”
He additional adds, “Gold can diversify the market risk away, and the accompanying price benefit is a profitable by-product of the investment.”
Additionally, research of investor behaviour have shown that men and women do not commonly book income in gold. Typically, professionals say a constant allocation of 5-10 per cent can provide sufficient diversification and hedge against inflation danger.