How much Gold to Invest in your Portfolio?

The role of Gold in your investment portfolio. Most of us don’t give Gold the respect it deserves. But sooner or later, the realization dawns that having a bit of gold in the portfolio might be a good idea. I have written about whether gold should be your long-term portfolio or not in the article – Gold ETFs & Gold Bonds for long term portfolio. I myself have been a gold investor for the last few years after denying the importance of gold in my portfolio for almost 15 years.

So if it’s important, then how much gold should you invest in?

Remember one thing though. Buying gold and investing in gold are two different things. Don’t mix the two in your head.

And before you think about investing in gold after looking at the historical gold price chart (like the one below), you need to understand something about gold price and its typical behavior.

Gold Price History 50 Years

Unlike stocks and bonds, gold has no intrinsic value or cashflows to offer. So the concept of valuation isn’t exactly applicable here. And the gold prices are more about the demand-supply equation at any point in time and factors affecting this equation (like financial crisis, geo-political issues, etc.).

As a result, the price of gold follows a peculiar pattern. And this pattern is occasionally accompanied by high volatility. Gold has got a bad name for giving lumpy returns. That is, it does nothing for years but suddenly out of the blue, it gives great returns occasionally that pushes up the long-term averages. So for a lack of a better word, and like equity investing, even gold has a timing angle to it. So maybe, if you want to time gold investments, it’s about accumulating it in years (or periods) in which it hasn’t been giving great returns.

There are many options available for investing in Gold in India. Like the Gold ETF, Sovereign Gold Bonds (SGB or Gold Bonds), and Gold Funds. Do read about the

difference between Gold Bonds Vs Gold ETFs and then decide which amongst the two, i.e. Sovereign gold bonds or ETFs is better for gold investment.

So let’s come back to the question at hand.

How much Gold to hold in your investment portfolio?

Generally, people will tell you to put 5% or 10%. But there is no one right answer here, to be honest. But in general, having some exposure to gold (ranging from 5-20%) in the long-term portfolio is advisable.

To be honest, 5% is too small an exposure and it will neither help much in portfolio diversification or as a portfolio hedge. But something is better than nothing when you are just starting on the journey of increasing the allocation of gold in your portfolio. Isn’t it?

Also, gold is more of a diversifier in your portfolio and a kind of hedge. It generally shouldn’t be the core of the portfolio.

So some possible portfolio allocation for a conservative investor can be as follows:

  • 90% Debt, 10% Gold, 0% Equity
  • 80% Debt, 20% Gold, 0% Equity
  • 80% Debt, 10% Gold, 10% Equity
  • 70% Debt, 10% Gold, 20% Equity

On the other hand, some possible allocations for an aggressive (or moderately aggressive) investor can be as follows:

  • 50% Debt, 5% Gold, 45% Equity
  • 40% Debt, 10% Gold, 50% Equity
  • 30% Debt, 10% Gold, 60% Equity
  • 20% Debt, 10% Gold, 70% Equity
  • 30% Debt, 0% Gold, 70% Equity

Also as I mentioned earlier the gold returns are very lumpy. They don’t move much for years and suddenly, shoot up. So increase the exposure when returns have been bad for some time and accumulate. And when it shoots up and you have ridden the wave a bit, it’s best to reduce exposure to some extent. I know all this sounds like timing but that is how it is.

Related reading – Should you invest in gold after price fall?

If you want to get into gold, then I would suggest you not to buy a lot of gold in one go. It is best to spread your investments in gold over a period of time (unless prices have fallen off the cliff and you have money to spare). And since both gold SGBs and gold ETFs have their advantages and disadvantages, it makes sense to gradually use both for your long-term investments. That is, investors can hold a combination of SGBs and gold ETFs. How? You can use purchase SGBs occasionally when new series are announced and you have funds available to invest. This can be augmented by purchasing gold ETFs when there are temporary short-term corrections in gold prices. Or if you want to accumulate gold regularly, then do a SIP in Gold ETFs every month.

Few additional thoughts:

  • If you are planning to use gold as a tactical part of your portfolio that you will regularly buy and sell, then you need to value liquidity more. And hence, investing in gold ETF is better.
  • If you plan to hold a large corpus in gold for the short term, then having it in SGB will mean that you will need large volumes on exchanges to exit your positions. But that is not feasible currently due to poor volumes of various SGB series of stock exchanges.
  • But if you are investing in the long term and are sure that you won’t need to exit before 8 years or so, then SGB may be a better option.
  • Or a combination of SGBs and ETFs can be taken to gradually build up allocation to gold in your long-term portfolio. This will provide a good balance of liquidity (via ETFs) and higher returns (via SGBs).

With regards to the role of gold in your investment portfolio, there is an interesting piece of text that I quote from an Investopedia article (link):

By purchasing gold, people can shelter themselves from times of global economic uncertainty. Trends and reversals occur in any currency, and this is true for gold too. Gold is a proactive investment to hedge against potential risks to paper currency. Once the threat materializes, gold’s advantage may have already disappeared. Therefore, gold is forward-looking, and those who trade it must be forward-looking as well.

In developed nations like the US, gold and precious metals can be made as part of retirement planning as well. There is a specialized individual retirement account (IRA) called the Gold IRA, that is often managed by different Gold IRA companies among many others. Using these Gold IRA accounts, the investors can hold gold and other precious metals as part of savings for retirement savings. India right now doesn’t have a retirement-linked gold instrument but Sovereign Gold Bonds are government-backed and can be used as part of retirement portfolio nevertheless.

Related reading – Should you buy gold coins for investments?

So that was about how much to invest in gold in your portfolio. Don’t be influenced by sharp price movements in short term and take a huge bet on gold. People will continue to make noise about Gold being a ‘safe haven’ or a ‘hedge’ and whatnot. There is also some noise occasionally about Bitcoin is New Gold. Ignore most of the noise. Start small and gradually build up your gold allocation as you deem fit. Don’t go too overboard. Not more than 20% is my view unless you really know what you are getting into. For others, having between 5-15% is more than enough.

And if you are looking at gold as a hedge against market falls and want to know how much gold in the portfolio will protect against a market crash, then the answer is that you need a lot more than just twenty percent. And that is not advisable.

1 comment

  1. The best investment in gold you rightly said is Sgb
    I cannot understand why would you invest in gold etf or physical gold as part of your portfolio
    Etf the mutual fund owners charge nearly 2 % per year so in ten years you would have lost 20 %. Even if there is no change in gold price where as sgb will give a return of 2.5% per year on the purchase price. For eight years and earlier the
    Liquidity was poor . deliberately created by the fund house in connivance with the regulatory authorities to discourage people from buying SGB so much so a sgb purchased from cdsl account could not be transferred to NSDL account. For nearly 30 days
    Plus the rumours floated by the gold fund houses the sgb is only paper and there is no gold purchased so if reserve bank fails you loose
    . This argument was given by the head of one of the fund managers which sold gold ETF
    I had to tell him even the rupee note is guaranteed by RBI. would love to hear your opinion

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