Gold: Five mistakes to avoid while buying yellow metal

Gold has a special place in Indian households. Purchasing the yellow metal and holding it for long years is an Indian tradition. Many financial planners, too, advise investing in gold. However, many remain confused on the timing and manner to approach gold buying. What price would be the best level to enter? How would the price move? How much should I buy? The uncertainty often leads to making wrong investment decisions.

Here are a few mistakes you should avoid while investing in gold.

Waiting for the right price

Some investors look at gold prices and wait until the prices settle down before investing. In that process they end up delaying investing in it. However, do not get worried about volatility. Though volatility in gold price, is the only way the yellow metal rewards investors. If the gold prices remain stable for years, then there are no returns. It is best to invest in gold in a systematic manner (SIP) over a period to time to average your holding price.

Ignoring diversification benefit

Tenets of personal finance require allocation to gold, because it offers meaningful diversification. Gold has a low correlation with other asset classes. If you have allocation to high risk asset classes such as equities, then you should also have gold in your portfolio. It acts as insurance for your portfolio in times of extreme volatility. Not having bit of gold in your overall portfolio would expose your portfolio to volatility risk. A 10-15 percent allocation towards gold provides meaningful buffer.

Hoping for regular returns

Do not confuse gold with fixed income instruments since there is no linearity of returns. While bonds pay fixed or variable rates of interest, gold does not pay anything. Also, price movements are not linear in nature. Many big price moves in gold may happen in a matter of a few days or weeks. Investors have to keep in mind this element of lumpy returns. Never try to extrapolate returns in the short term – be it positive or negative- to the foreseeable future.

Ignoring inflation signals

Gold prices adjust to the macro-economic changes and hence there is volatility. Gold also provides investors a hedge against inflation. In a scenario such as now when there are fears that inflation may spiral, gold acts as a good investment bet. Gold prices move up during inflationary times. As inflation rises, real returns from fixed income gets lower, thereby making investors turn to gold resulting in its process going up.

Not rebalancing allocation

Though you may be a long term investor in gold and may be investing at regular intervals do not forget to rebalance your asset allocation. Selling gold when the allocation tilts in favour of gold to such an extent that the gold allocation goes back to the original allocation helps you book profit. If the gold prices have fallen, then your portfolio allocation to gold will go down than what was planned. In such a situation you should buy more of gold. This also allows for some bottom-fishing. Such asset rebalancing in a rule-based environment – say once a year, can help you to reap the benefits of investing in gold.