For a long time, gold ETFs (exchange traded funds) used to get average net inflows of under ₹1,000 crore each month. That number had increased gradually over the last few months as the demand for gold went up globally. When AMFI announced the Jan-26 flow data, gold ETFs alone had got net inflows of ₹24,040 crore. What is more interesting is that the entire active equity funds category got net inflows of just ₹24,028 crore. We have not even counted inflows into silver ETFs, which were another ₹9,500 crore. That raises the big question; is a wall of euphoria being built around gold, and how long can the gold rally continue to rewards investors? 

Most analysts are calling the rally in gold a hedge against geopolitical uncertainty. The question is where is the geopolitical uncertainty. The war in Ukraine now matters less to the world than it did in 2022. Also, the sabre rattling in Greenland and Iran have been little beyond that. In recent history, 1979 marked the peak of geopolitical uncertainty, which is when gold had touched the previous peak. Incidentally, today the price of gold is much above the inflation adjusted peak price of 1979, which does not leave much upside room at a time when nations are signing FTAs and moving towards a more secure future. If dollar rebounds, how meaningful is the de-dollarization bet? 

The legendary Peter Lynch said, “When the liftman and the cabbie start giving you stock tips, it is time to exit the market.” He may have made it look dramatic, but there is an element of truth. Typically, solid bull rallies are built on 3 pillars. The first is attractive valuations. It is hard to pinpoint the valuation metrics of gold. However, the rally in gold in the last 14 years has been almost 5X, and that itself raises serious questions about chasing an unproductive asset. Secondly, bull markets are based on flows, which is still abundant. The third pillar is scepticism; which sustains bull markets. Sadly, that is missing, with almost every investor wanting to be on the buy side of gold. 

It is always hard to ignore the power of euphoria, especially when gold has actually been delivering returns consistently over the last couple of years. That is where the good old asset allocation approach comes in handy. Ideally, the gold allocation in your portfolio should range between 10% to 15%. Remember, gold is not an investment that competes with equity and other asset classes for returns. It is a hedge that is valuable because it has a negative/low correlation with equity and debt and offers stability. The reason investors should be cautious is that, today, gold has become volatile and is also not offering hedge benefits. That is what actually makes it a euphoria case!