Here’s Trying to answer a Million Dollar Question

During the financial meltdown, my portfolio took a huge knock. It was the biggest eye-opener I had ever experienced. I contemplated quitting the markets, but survived the strong impulse. From then on, I only operate in the markets with a hedge. Early 2008, I identified gold as my hedge, and ever since, I have maintained a steady 10% of my portfolio in gold.

I am stating this here because of the one question that is going around in everybody’s minds – what to do with their gold investments???

By default, I have to answer this question for myself. If my answer benefits anyone, even better.

And my answer to the question – What to do with my gold investment? is – nothing.

Yup, I’m not touching it. It’s a hedge, man, protecting the other 90% of the portfolio, which is inversely correlated to gold more than 80% of the time.

What happens if 400 dollars an ounce get knocked off gold’s current price? Well, I’ll be partying in Vegas, because the other 90% in the portfolio will have done well in this scenario.

And what happens if gold goes on to touch 1500 dollars an ounce, or even 2000 dollars an ounce eventually. Again partying in Vegas, this time because of gold, but the other 90% will have taken a bit of a beating, so I might party at home. But the bottomline is, I’ll get to ride gold if it sky-rockets.

Now what would happen were I not using gold as a hedge, but as a sheer investment. To illustrate this, let me give you an example. My relationship manager in Singapore who’s handling my gold investment just called twenty minutes back, excited and eager and rattling on about the current level of the investment and about how we had to book gold right now. Told him the same thing. It’s a hedge for me. Let it ride to 5000 dollars an ounce, I’ll still ride it as a hedge. What becomes clear is that if one has approached gold as a sheer investment and not as a hedge, one is facing the dilemna today of whether or not to book profit.

Frankly, I don’t know the answer to that one.

I’m good either way, with a decline in gold as well as with a rise in gold. So would you be, if you hedged. Hedging is for safety, and it comes at a cost. My investment in gold is the cost of protecting my bulk investments. So, by no means am I getting rid of it, despite the lure of the price level.

Thus ends the lesson in hedging.


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