MUTUAL FUNDS

We Recommend That Investors Allocate 10 - 20% of Their Portfolio to Gold <
12-Dec-11   17:31 Hrs IST

Mr. Chirag Mehta
Broad themes that would support gold prices going forward along with the persistent macroeconomic uncertainty are fears surrounding currency debasement, resultant inflation over the long run and diversification of reserves and investments into gold. We believe that increases in gold prices are well supported by fundamental macro economic factors. We at Capital Market interacted with Mr. Chirag Mehta, Fund Manager - Commodities of Quantum Mutual Fund, to know the outlook on Commodities and Gold in Calendar Year (CY) 2011.

Here are the excerpts: 

Overall how will the commodities perform in CY 2012 vis-à-vis CY 2011? Which commodities you are bullish and bearish on for CY 2012 and why?

The commodities complex should largely remain on a lower side baring a few exceptions (mainly gold). Given that growth in the developed world is likely to remain low and even the developing economies like India and China showing apparent signs of slowing down, it is likely that the demand for commodities will be weaker and hence prices should decline.

However, if we see more of quantitative easing policies or some other form of money creation adopted by central banks, then the decline in commodities may even not materialize as expected otherwise. 

Gold in India has been a great outperformer in CY 2011? What's your view on gold for CY 2012? How much percentage one should allocate into it?

Given the macro economic uncertainty coupled with softening economic readings, it was indeed logical for gold prices to increase on back of safe haven demand. Turmoil in financial markets on concern that global economic growth is stalling as governments in the U.S. and Europe remain constrained by debt drove investors to the safety of gold in order to preserve wealth.  Currency interventions by countries like Japan and Switzerland are facilitating another round of currency debasement. Various factors like the persistence of debt issues in the developed world, weak economies, currency debasement and the resulting loss of confidence in paper currencies and government is driving investors to gold. A prolonged period of ultra-low currency yields and persistently dovish tone from the Federal Reserve have been supportive of the price increase.

The U.S. and Europe have structural problems, and there's a camp of investors that are willing to buy until these problems are fixed. Gold is historically time tested, stable form of money which promises to store value over long time periods. The race to the bottom between the fiat currencies will continue as each sovereign nation believes that doling out cash will get them out of this economic mess. It is amusing to see that those involved in the currency devaluation, have not noticed that each round of currency devaluation negates the previous one.

The uncertainty in financial markets, whether from the growth outlook or the ongoing sovereign-debt crisis, is expected to remain a benefit to perceived safe-haven commodity assets, of which we believe gold is the standout.  As the economic problems around the world continue to manifest, more and more people are identifying that gold is the ultimate safe-haven asset.

Broad themes that would support gold prices going forward along with the persistent macroeconomic uncertainty are fears surrounding currency debasement, resultant inflation over the long run and diversification of reserves and investments into gold. We believe that increases in gold prices are well supported by fundamental macro economic factors. We recommend that investors allocate 10 - 20% of their portfolio to gold and use any decline in prices to increase their allocations or rather keep investing systematically and reach the desired allocation level.

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