This is not just a gold price rally driven by weak dollar or by Jewellery demand. This is a rally that has been driven by central bank buying and by investment buying, as evidenced by ETF demand. Global spot gold prices at $3,327/oz is now even higher than the inflated price of the January 1980 peak. Even at such lofty gold prices, central banks continue to accumulate gold as a viable option to holding dollars. It is not just China and Russia, but even countries like India and the rest of the EU are splurging on gold. It is the only asset that truly glitters! 

There is panic buying in gold at multiple levels. Countries like Russia and China are buying gold as a means of reducing their dollar exposure. Then there are the likes of EU, where most of the countries already have large reserves of gold. They are not only adding gold, but also getting their gold stashed in other countries, back to the home country. Then there are the ETFs that are buying gold as a hedge to sell to institutional investors. Gold is not just the best performer last year, but also in the last 10 years. It is rare that gold has outshone equity consistently! 

If you had advised your clients not to buy gold like equity, you would have been proven wrong in the last 10 years. Gold is traditionally seen as a hedge and not as a return generating asset. However, in the last 10 years it has belied that very definition. One good thing is that buying gold at higher prices may not be such a big risk at this juncture. For now, it does look like political uncertainty and macro risks are here to stay. Hence, it may not really matter at what price you buy gold. The best strategy would still be to limit your gold exposure in the portfolio to 10% to 15% of portfolio value. Even if gold looks too exciting, it is best to limit to 15% and look to spread across other asset classes so you do not lose out on the fundamental merits of diversification! 

The real worry today is not about gold buying at higher prices. The real worry is about the proliferation of gold loans in India. The organized gold loan market is about ₹7.1 trillion, which is less than 6%  of total gold holdings. However, the gold loans from unorganized lenders is nearly twice the organized segment. So, actual gold loan size may be closer to ₹21 trillion and that is huge. Most people are paying usurious rates and have used top-ups to the hilt. Even a 10-12% correction in gold prices can trigger a mix of margin calls and panic selling in gold. That is the real risk in gold to be watching out for!