The Hindu Business Line : Buy Gold ETFs

Looking for an investment option that will perform well when stocks don’t? Gold fulfils this role admirably. Low historic correlation with the Sensex and long-term returns that beat inflation are the key reasons for an Indian investor to allocate a portion of his portfolio to gold. The 23 per cent correction in global gold prices (to $765/ounce) from record levels in March 2008 presents a good opportunity for investors to add gold to their portfolio now.

The investment argument for holding gold arises not so much from its ability to deliver stellar returns, but from its tendency to perform well when other assets don’t. Gold, for Indian investors, has delivered a compounded annual return of 11.1 per cent over the ten-year period from 1998, while the Sensex has managed about 13.3 per cent. Inflation in this period averaged 5.4 per cent. Gold’s respectable ten-year return is bolstered by its 30 per cent surge since 2006. But the key point to note is that gains in gold prices have often coincided with stock market declines. Gold has delivered a positive return in nine out of the ten worst months for the Sensex, reckoned over the past 15 years. For instance, gold prices rose 11 per cent when the stock market meltdown flagged off in January. Calculations for a 15-year period show that returns on gold carry a near-zero correlation with the Sensex, further evidence that gold seldom moves in the same direction as the stock market. Indian investors should also note that a depreciating rupee translates into gains on your gold holdings. This is why, while global gold prices are down by 9 per cent so far in 2008, gold prices in India have actually risen 7 per cent.

However, investors looking to buy gold should take note of the following:

- View gold as a diversifier for your portfolio, rather than as a means to prop up returns. Allocating about 5 per cent of your portfolio to gold can help even out swings in overall returns.

- As gold price gains tend to accrue over relatively short periods; timing your entry carefully is as important as with stocks.

- Of the various investment vehicles to acquire gold, Gold ETFs listed on the domestic exchanges offer the most transparent, cost- effective and liquid option. Benchmark, Quantum, UTI and Kotak offer listed Gold ETFs. - Aarati Krishnan

Gold technicals

The structural uptrend in gold that began from the $255/ounce mark in 2001ended at $1030 this March. A 38.2 per cent retracement of the move from 2001, points to support for gold prices at $737 levels. The preferred view is that the current correction can halt between $720 and $740 and the metal then spends a few months moving between $720 and $900. Subsequent supports on the long-term charts are at $686 and $650. The long-term view for gold stays positive as long as it trades above $650. - Lokeshwarri S.K.

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