How much should we invest in Gold?

We spoke to two different people from ICICI and HDFC to get their views on gold as an asset class. Let’s see what they have to say, especially when euphoria surrounds us across many asset classes today.

One historical perspective by Chintan Haria (VP at ICICI Prudential) was that whenever USA fiscal deficit was high and whenever USA debt to GDP was high and whenever USA printed money abundantly, Gold performed better. This was the situation in between 1970-80, 2000-2011 and of course once again now in 2020 - 2021. In 1970s – US President Mr. Nixon did away with the Gold Standard system. This led to the actual price discovery of gold and a subsequent bull run in gold between 1970-80.

The current situation is indeed familiar- USA debt to GDP is high and the US A Fed is printing money every day and Gold should do better as per historical patterns. But based on the past 10-year historical returns, investors are still skeptical about adding gold. However, history has shown that gold is expected to do better in the near future.

If we consider the value of global assets, total global debt value is $220 trillion, total global equity market cap is $110 trillion. However, total value of mined gold is only $11 trillion.

“Out of this $11 trillion worth of mined gold, about $8 trillion is locked in jewelry as well as with global central banks and a significant part of gold jewelry is in South Indian households. Remaining $3 trillion worth of gold is floating around through trading, ETFs etc. If there is a shift of just few trillion from debt to gold, gold will get rerated and move up.”

CHINTAN HARIA
Vice President, ICICI Prudential
Asset Management Company Limited

“Gold reserves and fresh identification of gold mines are tepid, hence supply constraints will also support the upward movement of gold prices. Gold cannot be a replacement for debt due to its volatility. However, since the yields from debt are quite low, allocation to gold can be between 5% to 10% of the portfolio. ”

MIMI PARTHA SARATHY

Now compare that to the view of Prashant Jain (Chief investment officer of HDFC MF)

Gold has immensely benefitted due to extremely low global interest rates all over the world. Since the interest rates in USA and Europe are near zero, this has benefitted gold and investors have moved money to this asset class already causing its prices to rise.

Usually, inflation is good for gold. However, nobody has an answer to the question of whether inflation will sustain? One of the key questions to be answered is when will the interest rates in USA go up? Interest rate movement upwards would be negative for gold since gold returns will come down and money will move to debt as returns will be seen in debt.

Though the performance of gold may continue to shine, we must remain cautious since gold performance is based on inflation and we are not clear whether inflation will sustain over the next few years and when interest rates will move up. Therefore, gold should only be a part of the portfolio, approximately 5% to 10%, as a hedge and to give moderate returns.