Gold to form a balanced portfolio for Pakistani investors

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To maintain a stable portfolio, investors are believed to diversify their investments by including Gold which offers a strong hedge against falling interest rates, uncertain economic conditions, currency devaluation and losses by other investments said a study on Tuesday. Gold gave a ravishing 897% returns over the last ten years from Rs. 6280 per tola in 2002 to Rs.62600 per tola in 2012. A recent article, “Institutional investors likely to diversify to shares, property” by Salman Siddiqui published in The News, misled the general public and potential investors into thinking that Gold is not providing competitive returns. On the contrary, Gold has outperformed most of other investments like stocks, bonds, currencies in the past ten years and remains one of the key components of a balanced portfolio. On the contrary, Gold has outperformed most of other investments like stocks, bonds, currencies in the past ten years and remains one of the key components of a balanced portfolio.
Pakistan is currently going through turmoil of political and socio-economic instability and in times like this, Gold is believed to be a tool for diversification and a hedge against losses made by other investments. Safdar Ahmed, a 34-year old Pakistani agriculturist agrees, “At one point of time, I try to have at least 20% of my net worth, if not more in Gold. Considering the state of our nation, I won’t be surprised to see another 2008 (stock market) crisis. By keeping Gold in my portfolio, I will hopefully be able to reduce the negative impact of any other similar situation.”
Gold also has the ability to provide more liquidity compared to other asset classes like real estate and stocks, especially in times of crisis. It is not based on the performance of the economy and financial markets. On this note Saad Rafi, Head of Commodities, AKD Securities advises, “Gold is also an excellent store of wealth. Risk management has become a very important part of investment and owning at least some percentage of gold provides investors with the hedge that is needed.”
In recent times, Gold has become very expensive. Investing in bullion requires huge capital. The Pakistani Government recognized this dilemma and established a regulated exchange which offers online trading of Gold. PMEX, as an exchange, has also been offering physical gold for trading/investing purposes. This is the most authentic form of Gold available in the market, in an internationally acceptable tamper proof packaging, imported from PAMP SA, the world’s biggest Swiss refinery. The Exchange uses ACM Gold as their sole suppliers of physical gold and this is the reassurance that the investor needs because ACM Gold is known for its integrity with their reputation going back almost a decade.
When it comes to maintaining large portfolios and institutional investments in Pakistan, these also mostly offer around 20 per cent exposure to Gold. “Currencies are not backed by anything tangible; however, Gold has an intrinsic value which will never make it worthless,” says Kashif Rafi, SEVP, Arif Habib Investment Ltd. “Gold will give all kinds of investors a brilliant hedge against currency depreciation, which is why it is a good idea to back your funds with Gold.”
Pakistani Rupee has declined by almost 40% in the last 10 years, and this gives Gold an extra push as Gold is denominated in Dollar, making it a good security in Pakistan. On asking Muzammil Aslam, Former Economist of JS Global and currently running a Research Consultancy, about the depreciation of Pakistan Rupee, he explains, “In Pakistan, the government has accumulated so much debt, whilst continuously printing money. Moreover, with the nearly $2bn International Monetary Fund (IMF) payment and falling interest rates, the situation does not look very hopeful in the long run, causing Pakistani Rupee to depreciate even more. Also, the upcoming election year leaves an uncertain picture. However, I do believe that the interest rate cut cycle will be over soon. But with this entire uncertain situation, Gold appears as a necessary element of a portfolio.”
The Securities and Exchange Commission of Pakistan (SECP) has also recently allowed asset management companies to offer Gold schemes to investors. The introduction of the scheme was the longstanding demand of the local market and is expected to become very popular among the general public. “Pakistan has not yet seen a complete Gold fund. This will give investors the exposure that they need in Gold, without having the expertise required. Lack of new listing, blue chip companies and quality stocks at Pakistani Stock Exchanges make Gold attractive. We also have a huge Shariah Compliant Market in Pakistan, in which, we believe this fund will be very popular,” says Muhammad Imran, Chief Investment Officer, ABL Asset Management.
Gold’s increasing performance over the years is a result of increasing demand, falling supply and safe haven influence. On asking ACM Gold Analyst, Junaid Zakaria, he elaborated on the deteriorating global conditions which include worsening US outlook and the Europe Crisis.
“The crisis situation in the West and Europe has had its trickle down affect worldwide,” added Zakaria. “Credit rating agencies are downgrading world leaders like USA and France. Investors are left with no option but to swap major currencies pairs for some lucrative asset class like Gold. I believe the value of gold hardly decreases over time as the yearly trend of buying bullion on various occasions is still instilled in local communities of Pakistan, India and China. Gold may undergo some correction in price, but over time, the value rises.”