A Festive Guide to Smart Investing in Gold
By Brijesh Bhatia (@bbrijesh9/X)
Pune, 20th October 2024: Investing often appears straightforward, especially for those comfortable with the idea of buying and holding stocks over the long term. Have you however considered the importance of “Asset Allocation”?
Diversifying across different asset classes is essential to effectively manage risk while enhancing potential returns.
What are the Different Asset Classes?
Asset classes typically include Equities, Bonds, Real Estate, precious metals (like Gold, silver), and Cash or Cash Equivalents. Each of these reacts differently to market conditions, offering a balance between risk and reward.
For instance, equities are known for their growth potential but are susceptible to significant volatility. Bonds, on the other hand, offer more stability but have a relatively lower return profile compared to equities. Real estate provides an inflation hedge, while gold, often seen as a ‘safe haven,’ tends to perform well during periods of uncertainty.
What is Asset Allocation?
Asset allocation is the strategy of allocating your investible surplus across various asset classes to balance risk and reward according to your financial objectives, risk tolerance, and investment time frame. Rather than focusing solely on selecting the top-performing asset at any given moment, the aim is to create a diversified portfolio that can endure different market environments. The right allocation minimizes risk and enhances returns, particularly during volatile market conditions.
Well, Punekar has always believed in investing in real estate and gold, as we have witnessed many gold men in Pune, but diversification must also be considered.
Nifty’s Recent Decline and the Case for Gold
Looking at recent developments in the Indian markets, the Nifty index recorded a significant weekly drop of 4.45%— biggest fall since June 2022. More than the benchmark Nifty 50 index, the broader markets consisting of the mid-Cap and Small-Cap stocks have taken a backseat in the past few months.
In this context, it may be an opportune moment to reassess your asset allocation. With profit-taking on the rise in the equity markets and also shifting part of your investments from equities to gold could be a wise strategy.
Ratio Chart Analysis: Gold/Nifty50
Ratio charts help compare the performance of two assets. In this case, the Gold/Nifty50 ratio chart allows us to see how gold performs relative to the Nifty index. When the ratio increases, it indicates that gold outperforms Nifty, and when it decreases, Nifty outperforms gold.
Gold/Nifty50 Monthly Ratio Chart
Source: Zone, Definedge Securities
The Gold/Nifty50 ratio chart for MCX Gold Futures shows that the trend has turned upward from a multi-year support level, indicating that gold could outperform Nifty in the upcoming months. The chart appears ready to break out of its channel, suggesting a bullish outlook for gold with three potential scenarios:
- Both gold and Nifty rise, but gold rises more.
- Gold increases while Nifty declines.
- Both fall but gold experiences a relatively lesser damage than Nifty.
Bullish Breakout in MCX Gold
The MCX Gold chart further reinforces this outlook. According to the Daily 1% X 3 Point & Figure (P&F) chart, MCX Gold recently broke through a Triple Top Breakout (TTB) pattern, signalling a bullish trend.
MCX Gold Futures Chart
Source: Zone, Definedge Securities
P&F charts indicate that gold’s upward momentum is likely to remain strong in the short to medium term, potentially positioning it to outperform Nifty soon.
Given these technical signals, it may be time to increase your allocation to gold or add it to your portfolio if you haven’t already.
The upward trend in the Gold/Nifty ratio and the bullish signals in gold charts present a strong case for revisiting your asset allocation strategy, focusing on increasing exposure to gold.
Hey Punekar, it is time to increase your allocation to gold this Diwali.
Disclaimer: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. This article is strictly for educative purposes only. As per SEBI guidelines, the writer and his dependents may or may not hold the stocks/commodities/cryptos/any other assets discussed here. However, clients of Definedge may or may not own these securities.
(About Author: Brijesh Bhatia has over 18 years of experience as a trader and technical analyst in India’s financial markets. He is a well-known face in the business channel as a Market Expert and has worked with broking giants like UTI, Asit C Mehta, and Edelweiss Securities. He is currently a Senior Research Analyst and Editor at Definedge.)
