It is OK to own less Gold now...

Lately, the buzz around Gold has increased multi-fold after hitting new Life-time highs. Everyone seems to have woken up to the idea of investing in yellow metal. Many have overnight read a lot about the latest trends in the global financial markets, and appear to be in full concurrence with the idea of structural decline in the relevance of USD as global reserve currency.

However, the views about the rise of EUR or CNY as alternative reserve currencies do NOT seem to be cheerful. This uncertainty about the future of the global financial system is probably driving the interest of investors towards gold, which has traditionally been a popular reserve currency and preferred store of value during crisis periods in particular.

Firstly, we would like to remind the inquisitors that it has been our consistent stand in the past three decades that gold being mostly an unproductive asset, having little industrial use, does not qualify to be an "investment" grade product. Given its popularity and general acceptance in the global financial system, it does qualify to be a decent alternative to the paper currency. It therefore does well with the rising inflationary expectations and negative real rate environment. We therefore use it more as a tactical shift from cash & bonds; and sometimes as an opportunistic trade. We never use it as a permanent asset class in our asset allocation. 

Below are some excerpts on how we have played Gold over the last few months and what led us to cut Gold allocation in this period after being bullish on it from Dec 2018-Feb 2020.

In our investment strategy update for 2020 in December (see here), we had stated:  

"In view of the adverse risk reward ratio and growing divergence between bond and equity yields, we shall scale back our strategic equity allocation to 50% from 60% presently. The strategic asset allocation now stands at 50% Equity; 25% Gold and 25% Debt."

However, as the news of COVID-19 outbreak from China spread and global markets started to take note of the crisis in February we revised our asset allocation to sell the tactical allocation to gold and upgrade equities to overweight in late Feb (see here). Incidentally, markets tanked in March-2020 affording us an opportunity to make the shift at favorable prices.

In April 2020, after the global economy went into a lockdown, we made a big call, increasing the equity allocation further (see here : "Time to Take Big Call"). We maintained our equity overweight stance on asset allocation and increased equity allocation further to 70% from the previous 65%, cutting the debt allocation from 30% to 25%. The overweight stance on IT, Pharma and chemical (including agro chemical & speciality chemicals) was adequately emphasized.

We are pleased to note that the strategy has worked out well so far. Since the recent bottom of the market recorded on 24 March, IT sector has returned 61%, Pharma sector has returned 57%; Nifty is up 48%, S&P500 is up 41% and gold is higher by 29%. The chemical sector has also outperformed the benchmark Nifty and gold comfortably. Average IT sector mutual fund return has been 35% (absolute) in the past 3 months.

We therefore do NOT see much point in this brouhaha over gold, and would prefer to continue with our strategy for some more time, till we see indications of an imminent and material correction in the equity prices. Gold is currently maintained at 5% in the overall asset allocation Model despite the consensus that it will continue to do well. (The latest asset allocation note - see here and here).

Market does not hate or like any asset class. It just handsomely rewards those who can play business cycles better than others. And we continue to endeavor to play the cycles to the best of our ability without bringing in any market-driven or personal bias!

PS : A twitter thread here for Gold fundamental reading and data points which I keep posting frequently.