`Invest in gold with opportunity of benefiting from potential increase over long-term`

Indianexpress:finance Buzz ''There doesn't seem to be any material change in the fundamentals that have led to the Bull Run in gold,'' says Chirag Mehta, Fund Manager, Commodities, Quantum Asset Management Company. In an exclusive interview with Varsha Inamdar, Chirag Mehta further said, ''In an optimistic view, gold should slowly and steadily become an important allocation to one's portfolio.'' How do you see demand for the bullion segment? How should investors approach it at the moment? Demand from consumption centers like India and China largely seem to be on a firm footing. Investment demand has been robust and would continue to grow lending support to gold prices. The current relatively high prices seen recently are supported by fundamental factors, and thus negate any speculation that gold is a bubble. Broad themes that would drive gold prices are currency debasement, rising inflationary fears over the long term and diversification of investments and reserves to gold. Gold as a percentage of total investments is still very miniscule. Even a small shift to gold can lead to large price increases. If concerns surrounding Quantitative Easing 3, monetization and European sovereign debt defaults trigger another broadly based loss of risk appetite, investors would no doubt want to increase their gold holdings. Gold should see good demand going into 2012 as well. Demand would likely be atleast similar or higher that seen in 2011. Also, the uncertainty in global markets keeps demand for gold on a higher side. Rising incomes in key consumption centers like India and China would also lead to increased demand for gold over the medium to long term. Going by the episodes of 2008 and 2011, where gold was amongst the very few assets that stood still and delivered positive returns, investors are understanding the importance of gold in their portfolios by the episodes of 2008 and 2011. In an optimistic view, gold should slowly and steadily become an important allocation to one's portfolio. How high and low could gold go in 2012? Long-term trends in gold prices are driven by changes in the overall level of confidence in the monetary system and the economy. Therefore, to analyze gold over the long term, it needs to be seen as a monetary asset rather than a commodity. Given the current economic backdrop, where governments are struggling with problems like rising deficits and unsustainable debts, it is indeed logical for gold prices to increase in value. Gold prices are clearly trending upwards over the long term. The macro-economic and supply-demand drivers point to a continued increase in gold prices. The uncertain macroeconomic environment and looming inflationary threat over a long term reiterates the need for gold in one's portfolio. Do you think gold will remain bullish in 2012? Remember why gold has climbed for 10 straight years, and from that long term perspective, not much has changed for gold. The main reason to believe that gold's fundamentals are probably intact is because of the policy-making theories, mainly the theory that the economy can be made stronger via more monetary inflation, further credit expansion and more government spending. Diversification of reserves and investment into gold seems to be the course of action, and is likely to continue in the future as well, thereby supporting gold prices. The corrective phases in gold prices tend to drive gold from weaker to much stronger and stable hands thus reinforcing the diversification theme. To sum up, there doesn't seem to be any material change in the fundamentals that have led to the Bull Run in gold. Do you think investing in silver is better than gold now? Let us look at historical performance of gold and silver in times of distress i.e. when the equity markets are in the bear phase. Gold's performance over the decade  Start Period  End Period  Days  Sensex  Gold Silver   Gold's outperformance vis-à-vis Silver  Feb-86  Mar-88  760   -41%  45%  26%  19%  Oct-90  Jan-91  108  -39%  -4%  -17%  13%   Apr-92  Apr-93  390   -53%  13%  10%  3%  Sep-94  Jan-96  509  -37%  20%  16%  3%  Jun-96  Dec-96  170  -33%   -2%  -5%  3%  Aug-97  Oct-98  440  -39%  10%  33%  -23%  Feb-00  Sep-01  585  -56%   4%  -3%  7%  Feb-02  Oct-02   243  -24%   6%  -1%  7%  Jan-03  Apr-03  108  -13%  -7%  -7%  0%  Jan-04  May-04  129  -26%  -11%  -11%  1%  May-06  Jun-06  35  -29%  -19%  -32%  13%  Jan-08  Mar-09  423  -60%  41%  12%  28%  Nov-10  Dec-11  409  -27%  36%  28%  8% An interesting trend, isn't it? Every time the Sensex (representation of equity markets) has dipped, gold has emerged as the knight in shining armour. And where does silver feature in all of this? Silver has outperformed gold only once - August 1997 to October 1998. So, if you are looking at silver for a more affordable diversification tool, then silver doesn't quite make the mark as compared to gold, at least not if you follow the historical trend listed in the table above. If you consider price behavior, silver can be best described as ''half gold, half copper''. Like gold, the price of silver is based on its role of being used as a currency, and yet, like copper, a significant part of silver's price comes from its growing use as an industrial commodity. Since 2003, economic activity growth led to an increase in the demand for industrial commodities. Thus, like other base industrial metals, silver prices also saw a rapid increase. But, when the global crisis hit the economy in 2008, the demand for industrial commodities literally collapsed along with their prices. And, this period saw a sharp decline in the price of silver. If you are upbeat about the economy, you should be bullish about silver in the intermediate term. If your confidence in the economy is not much to speak about, it would probably be sensible to be bearish about silver in the intermediate term. Gold is a time tested asset which acts as an excellent portfolio diversifier and a keeper of value against the vagaries of inflation. Therefore, if you chart a pyramid for your investments, it should be a part of its base, along with your safe money/ crisis money distinctly kept aside. Silver on the other hand, should ideally be at the top of the pyramid, where you have your play money i.e. either a speculative bet on silver as a commodity or based on demand supply fundamentals. But, do remember, that silver is likely to provide exposure just the way your equity investments would, since both are dependent on economic activity. Would you like to share anything else with our readers? Although the increased custom duty has made the purchasing gold in India a bit more expensive, investors should remember that they would recover the difference when they sell their gold holdings. Such small increases in duties was an expected phenomenon and will only marginally increase the purchasing price of gold. Investors should look at the long-term position, and invest in gold with the opportunity of benefiting from potential increase in its prices over the long term. They should also look at the diversification benefits that gold provides, as proved by the recent episodes of 2008 and 2011. Afterall, the only thing constant is change-be it the weather or the government.