Gold can balance the portfolios of Pakistani investors

The commodity is an excellent hedge against economic uncertainty.

Samra Shah/sabika Khan January 13, 2013
Gold’s increasing attractiveness over the years is a result of increasing demand, falling supply and its influence as a safe haven for investment. PHOTO: FILE

KARACHI: Investors diversify their investments by including gold to maintain a stable portfolio. The commodity offers a strong hedge against falling interest rates, uncertain economic conditions, currency devaluation and losses incurred on other investments. Gold gave a mind numbing 897% return to investors over the last ten years. Its price increased from Rs6,280 per tola in 2002 to Rs62,600 per tola in 2012.

Pakistan is currently going through political and socio-economic turmoil. In times like these, gold is believed to be a hedge against losses made by other investments. Safdar Ahmed, a 34-year old Pakistani agriculturist, agrees: “At any point in time, I try to have at least 20% of my net worth, if not more, in gold. Considering the state of our nation, I wouldn’t be surprised to see a repeat of the 2008 [stock market] crisis. By keeping gold in my portfolio, I can hopefully avoid the negative impact of a similar crisis.”

Gold also has the ability to provide more liquidity, compared to other asset classes like real estate and stocks, especially in times of crisis. Its valuation is not based on the performance of the economy and financial markets. Saad Rafi, Head of Commodities, AKD Securities advises: “Gold is 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.”

The Pakistani rupee has declined by almost 40% over the last 10 years, and this gives gold an extra lustre as an investment: gold prices are denominated in dollars, making it a good security in Pakistan. “In Pakistan, the government has accumulated too much debt whilst continuously printing money. Moreover, with nearly $2 billion due in International Monetary Fund (IMF) payments and falling interest rates, the situation does not look very bright in the long run, which will cause the Pakistani rupee to depreciate further. Also, the upcoming election paints an uncertain picture for the economy. In this context, gold appears to be a necessary element of any portfolio,” says Muzammil Aslam, former economist at JS Global who currently runs a research consultancy.

The Securities and Exchange Commission of Pakistan (SECP) recently allowed asset management companies to offer gold schemes to investors. The introduction of the scheme was a longstanding demand of the local market and it is expected to become very popular. “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. 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 at ABL Asset Management.

Gold’s increasing attractiveness over the years is a result of increasing demand, falling supply and its influence as a safe haven for investment. ACM Gold Analyst Junaid Zakaria says: “The crisis situation in the west and Europe has had its trickle down affect worldwide. Credit rating agencies are downgrading world leaders like the US and France. Investors are left with no option but to swap major currency 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 only rises.”


Published in The Express Tribune, January 14th, 2013.

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B | 8 years ago | Reply

This is what Warren Buffet had to say about investing in gold:

Please read the part of the letter where he talks about gold as an asset class. To sum it up, he says: "You can fondle the cube, but it will not respond."

bba | 8 years ago | Reply

Gold is good for low and medium tier investors only to hedge but if a person is looking for returns then there are other options like fixed return investments; which is liquid and offer attractive returns; no loss involved....plays more vital role then Gold. For first tier investors Real Estate has the same stance as gold in term of Prices; but agreed it lacks liquidity.

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