Investing: Gold will continue a good show in 2012

The year 2011 ended on a bad note for most asset classes. Only returns from gold and silver were in the green.

So, an investor who put money in gold at the beginning of 2011 earned higher returns than those who focused on bonds, stocks, commodities, silver and real estate.

If one adjusts the returns with inflation, only gold gave positive returns. The yellow metal rose 32 per cent in rupee terms, while it returned 11 per cent in dollar terms.

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The value of stocks and commodities, on the other hand, declined over 20 per cent each. Commodities would have suffered more, but a depreciating rupee arrested the fall.

The rupee depreciated 18.7 per cent against the US dollar. Bonds and debt funds fetched six-nine per cent.

Silver, the biggest outperformer in 2009 and 2010, looked like heading in the same direction in the first few months.

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However, a significant correction in the last eight months wiped out most of the gains.

The white metal ended the year eight per cent higher in the Indian market. Globally, it was down nine per cent. Again, the rupee came to the rescue.

Cash in hand, which rose 12.5 per cent (a 35 per cent rise over the last two years) to Rs 9,88,658 crore as on December 16, according to Reserve Bank of India data, would have also returned positive.

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And, with savings deposit rates hikes by some banks, returns on idle cash in banks would be more impressive.

Waning liquidity, loss of appetite and failure of big players in the commodity segment of MF Global hurt the overall sentiment. This led to a fall of 20 per cent in this segment, globally.

Growth-oriented equity funds, a retail investors' best friend for long-term wealth creation, were hurt because of an almost 25 per cent fall in the Sensex.

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Interestingly, while Asian and European markets suffered throughout the year, the US benchmark Dow Jones Industrial Average was the only one to turn in positive returns of six per cent.

And, this was despite the troubles the US economy faced throughout the year.

With gloom and doom continuing to haunt the financial markets, experts do not see much hope from equities in the near future.

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"In the current scenario, investors' first choice should be putting money in debt. Of the debt portion, investments should be in tax-free bonds, which will help maximise tax-free returns. If you have gold, stay invested, increase its share in the total portfolio to 10-15 per cent, as this is the time to buy gold, though gradually," said Rajesh Iyer, head - products and research, Kotak Wealth Management.

For equities, Iyer felt though valuations might be looking cheaper, headwinds were still stronger. For commodities, the general outlook is not that attractive, but prices are seen to be near the bottom.

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Ajit Dayal, director at Quantum Asset Management, advises those who have appetite for equities: "Investors should seek shelter in companies with low or zero debt and in fixed deposits with safe companies, preferably public sector banks."

He also supports gold like most others: "We always recommend gold as a part of the portfolio. Our eternal recommendation is to invest in gold. The precise mix of equity, fixed income and gold, either directly or via mutual fund investments, is a function of every investor's needs, the time horizons, and the ability to withstand sharp and sudden erosions in investments."

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Gold has given positive returns over the last decade. According to Sudakshina Unnikrishnan, vice-president, commodities research, Barclays Capital, "The key factors that will determine support levels of the gold market is whether exchange-traded products' holdings remain relatively stable and physical demand responds to much lower prices.

"In the longer term, gold still possesses structural pillars of support in an environment of negative real interest rates and rising inflationary pressures, as well as continued central bank buying. We remain positive on gold prices for 2012, holding an annual average forecast of $2,000/oz."

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Staying invested in gold has more reasons.

According to data by the World Gold Council, "It's estimated gold bullion holdings by the end of 2010 accounted for just one per cent of total assets under management globally."

This means there is still scope to invest in the yellow metal.