'Gold has no fundamentals': Nilesh Shah warns investors against overexposure despite rally

A surge in central bank gold buying - triggered by the Russia-Ukraine conflict - is driving the current rally in precious metals, according to Nilesh Shah, Managing Director at Kotak Mahindra Asset Management. "So there's only one thing which is happening in the gold market apart from what was happening before - the central bank buying," Shah told CNBC-TV18.

"Global central banks post their experience of the Russia-Ukraine war, where Russia's $500 billion forex reserves were seized by the Western world, and that prompted every central bank to look for safekeeping of their reserves. The gold with Russia's central bank remained in their custody. This prompted everyone to shift part of their allocation from securities into gold," he said.

"Western world central banks' 60 to 70% of their forex reserves - in the US, in Germany, in Switzerland - is in gold. The Eastern world's - Japan, India, and China - allocation is about 10%. Now, the Eastern world's central banks have to increase their allocation to gold, and some have even started doubling in silver. So, it is the central bank buying over the last couple of years that has resulted in this kind of price movement."

When asked about the underlying value of gold, Shah said: "Even we don't know what is the underlying value of gold or silver. There's no dividend, there's no bonus, there's no cash flow, there's no fundamental things to value gold or silver. They are a store of value because of thousands of years of history. They are internationally tradable because everyone believes in that history. This creates unique characteristics for gold and silver."

"So, please be aware that both these assets, despite the sharp run-up, should be a limited percentage of your portfolio," he said, when asked about the ideal allocation to gold in an investor's portfolio.    

"These are assets where there is no fundamental value or there's no way to determine fundamental value. It's always in the belief that someone else will buy it from you at a higher price. So do invest in gold and silver, but being aware that these are the assets which are difficult to value fundamentally and hence should be a limited part of your portfolio," the noted fund manager said. 

Asked if the current uptrend is sustainable, Shah said: "I 100% believe that commodity prices fluctuate. If they have gone up, they will come down. And when there's a sharp runup like this, the correction also will be there. You have to observe two things. One, the central bank intervention. As long as global central banks behave like an Indian housewife - buying gold and not selling, you can be sure that gold prices will remain in uptrend. Does it mean that every day it will go up? Answer is absolutely no."

According to him, the central banks' move will determine whether the prices will go up or down. "We have to wait and watch up to what level the central bank will keep on buying. In the past, central banks have become net-sellers of gold." 

He also cautioned that in the past, the yellow metal has seen major price corrections. "There was a time when gold prices - if I remember correctly - touched $800 and then it corrected 75% to about $200. This was all driven by frenzy getting cancelled, and the central bank turning sellers because they thought this appreciation was too much. So do remember that gold prices have corrected in dollar terms by a large percentage."