Gold has emerged as one of the strongest-performing assets across most emerging markets in recent years, often delivering better returns than equities. Its prices have touched fresh record highs, earning gold the status of a “hero asset” for many investors. However, despite its impressive rally, experts now believe that the window for making large, aggressive investments in gold may have largely closed.

In a detailed discussion on a recent podcast, N. Mahalakshmi spoke with Kalpesh Parekh, Managing Director and CEO of DSP Mutual Fund, to understand why gold has performed so well and why his outlook on the yellow metal has now turned neutral.

Why Valuing Gold and Silver Is Challenging

According to Kalpesh Parekh, one of the biggest challenges with gold and silver is that there is no simple or direct way to determine their fair value. Unlike equities or bonds, these precious metals do not generate cash flows such as dividends or interest. As a result, traditional valuation methods do not apply.

To address this, DSP Mutual Fund follows a customized reference framework. Parekh explained that the firm looks closely at global money supply trends, particularly M2 money supply. Their model primarily considers US M2 data along with roughly half of the Eurozone’s M2, while excluding the rest of the world. This combined money supply is then compared with long-term gold prices to assess whether gold is trading above or below its fair value.

Why Now Is Not the Best Time for Aggressive Gold Investment

Using this framework, Parekh pointed out that current gold prices are close to their estimated fair value. This is a key reason why he believes this is not the right time to make heavy allocations to gold.

In his view, investors who currently have no exposure to gold can still consider adding it to their portfolios, but only in moderation. A 5–10% allocation for diversification purposes is considered reasonable. However, the phase where investors could meaningfully benefit from aggressive buying at lower levels appears to be behind us.

Simply put, the margin of safety in gold prices has reduced significantly.

Limited Margin of Safety in Gold and Silver

According to DSP’s valuation model, the fair value of gold is around $3,300 per ounce, which is close to prevailing market levels. For silver, the estimated fair value stands near $63 per ounce, while current prices hover around $55 per ounce.

With both metals trading close to their fair values, Parekh believes the scope for outsized gains has narrowed. Reflecting this view, DSP has reduced its allocation to gold and silver in its multi-asset allocation fund from about 22% to nearly 13–14%.

Gold’s Role in Portfolio Diversification

Despite his cautious stance, Parekh strongly emphasized that gold still plays an important role in portfolio diversification. Historically, Indian equity markets have delivered long-term returns of around 12%, while gold has offered approximately 11% returns over a similar period.

He explained that combining equities and gold in a portfolio and rebalancing it annually can actually lead to slightly better returns than holding equities alone. More importantly, such a strategy significantly reduces volatility. Portfolio fluctuations can drop by 35–40%, making investments far more stable during market stress.

While equities have a standard deviation of roughly 16%, and gold and silver individually show higher volatility in the 18–22% range, the combined volatility of a diversified portfolio falls to nearly 12%. This highlights why gold remains valuable—not as a return maximizer, but as a stabilizer.

When Gold Truly Shines

Parekh noted that gold tends to perform best when other asset classes become expensive or unstable and when gold itself has gone through a long period of consolidation. This pattern explains why gold has outperformed equities in many emerging markets recently.

He also shared his personal experience, stating that he previously maintained around 15% exposure to gold. However, after the recent sharp rally, he has trimmed his allocation, reflecting his belief that future returns may be more measured rather than explosive.

Final Takeaway for Investors

In summary, while gold has delivered stellar returns and remains an important diversification tool, experts caution that the ideal phase for heavy investment may already be over. Going forward, gold is more likely to offer stability and balance rather than extraordinary gains.

For investors, the message is clear: gold should still have a place in a well-diversified portfolio, but expectations need to be realistic. Instead of chasing past performance, a disciplined and balanced allocation strategy may be the smarter approach in the current market environment.

Disclaimer: The views expressed are those of the expert quoted and do not constitute investment advice. Investors should consult certified financial advisors before making investment decisions.