Tips to remember while investing in gold

Lovaii Navlakhi of International Money Matters recommends that upto 5-7 percent of the portfolio should be invested in gold and the best way to do this is through the ETF route.

In an interview to CNBC-TV18, Lovaii Navlakhi, International Money Matters shared his views on what should retail investors do with gold now after government hiked import duty on gold to 10 percent to arrest the declining value of rupee and contain the fiscal deficit to 3.7 percent of the GDP.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: The government is coming down heavily on curbing the appetite for gold, what does this mean for the retail investor, what should he do with his investments? Should he branch out to gold, should he branch out of gold?

A: Gold needs to be a part of every investor’s portfolio. We normally recommend that up to 5-7 percent of the portfolio should be invested in gold. During uncertain times you can enhance that allocation to 10-15 percent. Therefore, the best way to invest in gold is going through an exchange traded fund (ETF) route.

You need a Demat account, you can buy the units of gold based on number of grams and their rate. But the real issue is when people look at the past performance of any investment, any asset class and decide to put in bulk money. So anyone who has invested prior to April or early April this year will be staring at losses at this point in time. 

You should look at strict asset allocation and if you have invested 5 percent in gold, the value of gold has gone up 20 percent so your allocation to gold has increased marginally. You take out the profits every three-six months and that way you will ensure that you are within the asset allocation. 

For people who have put a large chunk of their money in gold, at this point in time the thought should be how do I reduce it from 20-25 percent of my portfolio to 10 percent? They should have three-six months’ time window and in a staggered manner they will gradually reduce this allocation to gold so that they are within the asset allocation norms. Very much like an SIP, how you invest gradually, divestment also could be done gradually.

Overall, gold is a hedge against inflation and if you are expecting growth to come back in markets globally then it may not be the asset class that will outperform but it still needs to be there as part of the asset allocation.

Q: My mutual funds portfolio consists of HDFC Top 20 , HDFC Equity Fund , DSP Small and Midcap and Reliance Vision Fund . Is this a profitable portfolio or should I make some changes?

A: He has invested a variety of funds, there are couple of large cap funds, a multi cap fund and a midcap fund. So he has created a decent portfolio. I am assuming they are equally allocated. 

If one was to look at performance then Reliance Vision Fund has underperformed in the last five years. It has gone only by about 13-14 percent in the last five years whereas all the other three funds have gone up by about 50 percent. So, Reliance Vision Fund is something that he should consider exiting.

Among the three schemes, DSP Small & Midcap is a midcap scheme, whereas HDFC Top 200 and HDFC Equity are large cap oriented. In the last five years they have shown equal performance. But the difference is stark in the past one year as well as three years.

While large caps have done okay, they have been flat in the last three years or so, the CNX Midcap index has fallen by 7 percent per annum. So he has to keep in mind that midcaps would typically take a longer period to perform especially if you have entered there in bad times. But it doesn’t mean that he shouldn’t have an allocation to midcaps.

If I look at specific schemes in each of these three categories, there are better schemes available. So for an HDFC Top 200 may be he can replace with Birla SL Frontline Equity . With HDFC Equity he can replace ICICI Pru Dynamic Plan . He can replace DSP midcap with ICICI Discovery. It is important to look at exit loads and capital gains impact so he should keep that in mind before he does that. He should not take out and put all the money into new fund simultaneously. Best if he has a financial advisor and if he doesn’t have one he should get one.

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Peter Hambro, one of the leading figures in Britain’s gold mining sector, has criticised hedge funds for distorting the market for gold and warned that there is potential for “disaster” in the industry.

Mr Hambro, co-founder and chairman of Russian gold miner Petropavlovsk, made the comment in an interview in The Sunday Telegraph.

The gold price, fixed at $1,376.12 per troy ounce in London on Friday, has fallen more than 30pc from a 2011 peak of more than $1,900.

Figures from the World Gold Council last week showed that ownership of the world’s gold shifted further East during the first half of 2013.

Overall demand for gold was 12pc lower in the three months to the end of June than in the comparable period for 2012, as Westerners dumped their exchange-traded holdings and Asian consumers responded to lower prices by adding to their hoards of jewellery and bullion.

“It’s rather odd,” said Mr Hambro, “Gold is streaming into the Far East. Russians are still buying; the Chinese are buying. There’s no secret. It’s in the international statistics.

“Where the selling came from that knocked the gold price down, I really don’t know. It was such a very strange thing.

“I’ve been in the gold business for 35 years and never known a big change like that where it wasn’t obvious where it came from.”

Asked whether he is concerned that hedge funds are distorting the market, he said: “The quantity of gold available for delivery on the Commodities Exchange in New York is at its lowest level ever.

“The size of the contracts is at its highest, but the deliverable is at its lowest. There is the potential for disaster in those numbers.”

“Fractional reserve banking in gold is responsible for a lot of the strange things going on. You can set yourself up as a hedge fund and nobody knows who you are.

“Because of these strange machinations and the distortion between the physical market and the paper market, it’s very hard to say what’s going to happen.
“There’s a real risk that the people who’ve sold 'paper gold’ won’t be able to deliver and there will be some official ruling that will settle all the bargains at today’s price. Something like that will happen.”

• Keep up with the latest on gold - bookmark telegraph.co.uk/gold

Petropavlovsk, set up as Peter Hambro Mining in 1994, is now the second-largest producer of gold in Russia, the world’s fourth-biggest producer.

Before the gold price slumped again earlier this year, the company locked in half its production for just over a year at $1,640 an ounce and is now hedged against gold price movements until next July.

The company is in the midst of a major cost-cutting programme aimed at reducing the $1.2bn of net debt it had in March to less than $1bn by the year-end.
Petropavlovsk shares have fallen by 75pc over the past six months, while the company is the most shorted stock in the FTSE All-share index.

The shares closed up 22pc at 119.5p on Friday, valuing Petropavlovsk at £223m. Mr Hambro has a 4.62pc stake.

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