POSTED BY February 15, 2013 3:39 pm COMMENTS (12)ON
In many blogs/articles, I saw that investing in gold for long time is not beneficial. We should not have more than 5% allocation for gold in the portfolio. etc…
Why is it considered as a bad investment? Is it because, the returns from equity always surpasses the returns from gold in long investment horizon?
I read gold has a negative correlation with equity. When the stock market is not doing great, the investors invest more in gold and the gold price rises. Similary, when the stock market is doing good, the gold price tends to be low. Is this information true?
Our market is going to be volatile. There will be ups and down. One way to handle this ups/downs is by investing using SIP. By investing through SIP, cost of units will be averaged, and is beneficial in longer run. When stock market is not doing so great(lower NAV), we get more units. Some people even buy more units by pushing extra money, to lessen the average cost of a unit. When stock market is in a bull run, we buy lesser units. But still it is increasing the average cost of the unit.
So instead of buying stock, when the stock market is doing good, why cant we invest in gold? Gold has the negative corelation thing with equity. So the gold price has to lower when stock market is doing good. Since we are not buying more equity units through SIP when the price is high, the average cost of the units will be lesser. Later when there is downside in the market, we could again invest in equity. If required, we could cash the gold that we have acquired for a lower price (gold should have a better price now, since the stock market is down). And buy more equity units. Thus we could have lower cost per equity unit.
I understand the above will work only if the equity market plays a major part in the valuation of the gold. If there are many more factors that affect the gold price, then it is not guaranteed to have the negative correlation to equity.
Am I thinking too much/stupid. I know it does not sound good to say invest in gold when stock market is doing good and invest in stock when market is not doing good.
Is there any other commodity like gold that have negative corelation to equity?