Gold is the bubble which can burst anytime. How to adjust your portfolio for it?

Written by: Monika Nihalani

Gold is the bubble which can burst anytime
No wonder! Gold is shining pretty well these days and it has substantial reasons to shine. The downgrade of the US' sovereign debt by Standard and Poor's to AA+ has given another very reason to this precious metal to show its radiance.

Until and unless the global economic instability continues, the buying euphoria among the investors wouldn't die. They are over-optimistic about the gold outlook. But, before you convert your all investments to gold, don't forget that it is trading at its all-time highs, it's a bubble which can burst one fine day. Find out why:

Speculative activities: Speculators purchase gold purely on the hope of selling at a higher price at some point of time. Ben Graham, the mentor of Warren Buffet has referred the term 'speculation' as the “greater fool" theory. That implies; “I know I am a fool to pay such a high price for an asset but I know that a greater fool will come along and pay me an even higher price."

Speculators are risk takers, they've extra surplus to invest and bear the risk. They are quick at moving something up but are also quick at moving something down.

No supply constraint: World Gold Council statistics say, annual gold production levels from major producers are meeting up the requirement so supply constraints are not an issue, it's just the global economic slowdown driving prices high.

No dividends or interest: Gold doesn't pay any dividend or interest on investment like stocks or bonds. It's just the store of value and you can gain only if you sell it at a higher price.

Inflation: Emerging economies like India and China are the world's largest consumers of gold, but India and China are going through inflationary pressures. Government have kept interest rates high to curb stubborn inflation. Due to high interest rates, the cost living is hurting earners, savers and seniors alike, because their incomes aren't growing. If prices are too high they wouldn't be able to buy gold.

Recent inflation figures say it is still quite high than government's comfort zone so interest rates might rise again. Earners will face contraction phase further which might kill demand for gold in coming future. So if demand shrinks, prices may fall in near future.

Bottom Line: Though it is one of the hottest investments over the course and if you are the one who has missed out the rally train, you can invest now. But do not overload your portfolio only with the gold. It should comprise of your portfolio but not more than 15-20%.

You can gradually add gold in bits and pieces in your portfolio and if you feel any downward pressure to occur on gold, you can start diversifying your investments to other assets.

Read more about: gold, invest, speculation, stock
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