Billionaire investor Warren Buffett once said that gold "gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
But other investors aren't thinking so, driving up the price of the yellow metal to a record high of $1,055 an ounce this week. Sanjiv Shah, executive director at Benchmark Asset Management Company, which has a gold exchangetraded fund, explained the rise and its implications in an interview. Edited excerpts:
What role should gold play in an investor's portfolio?
Gold is very critical in an investor's portfolio. Investors should look at asset allocation principles and invest in gold because its correlation with equities is very low. Therefore, gold reduces the risk in portfolio.
Are you saying gold should be used more as a hedge rather than a wealthcreating asset?
No. It should be used to diversify your assets and reduce the portfolio risk. That obviously adds to wealth creation because you are reducing risk.
What do rising gold prices mean and what lies ahead?
From what we understand, one of the main reasons is that there is so much liquidity created by central banks around the world, and people think that inflation is on the anvil because of all this new money. At times like that, gold becomes the port of call for many investors, especially at times of inflation and when inflation expectations are rising. That's why people are buying so much gold now.
They are also coming to the conclusion that it's a good asset to diversify your portfolio. Now, all international investors including savvy ones such as sovereign wealth funds and even central banks are buying gold. From what we hear, as long as this quantitative easing remains, gold prices will remain high and maybe even go higher.
What are the fundamentals that are driving this metal?
In India, it is mainly used in jewellery. So, that is one way of investing in such a liquid asset.
But most of the time, it is used as a monetary asset to hedge against inflation.
The rupee is strengthening. Shouldn't this mean gold is getting cheaper?
For Indian investors, yes, because it is appreciating.
So why is it that imports of gold in India are down?
People are not buying jewellery as such, because prices are already at a record high and, therefore, physical demand has come down. We don't know much about that yet.
What is your advice to investors at this point?
Our belief is in the principle of asset allocation. If you are not invested in gold, then 10-15% should be invested in gold at any point in time.
