How much should you allocate to gold in your investment portfolio?

cogollddAshish has been investing in gold for the past few years. He is very happy with the returns he has earned so far. He does not have an immediate need for gold, and he buys it only with the intention of accumulating wealth. However, Ashish is unsure about how gold prices will move in future and wonders if he should book profits now.

Gold should be seen as one of the many investment options that a household can use to accumulate wealth. Too much of any asset can hurt, if the price of that asset falls. Gold is a commodity so its price will tend to move up over time. Since investors do not adjust the price for inflation, they see all such increases as positive. Ashish should know that the long-term return from gold might just about be equal to the rate of inflation.

However, prices of assets are not always driven by long-term trends. There are short-term events that can move the price significantly above or below the long-term average. The demand for gold moves up when all other assets such as equity, debt, and currency fall. When there is an unexpected crisis in the markets, that leads to worries about how the future looks, investors seek refuge in gold.

Ashish should look at an allocation of about 10% of his wealth in gold, as a hedge against unforeseen events. Investing more than that would expose his portfolio to risk. Since he has no need for gold, he would be holding an asset that he is unlikely to need and use. Wealth building should be need-based and diversified. Ashish should desist from building wealth based on a view about future prices.


Author: Ayaan