Throughout history, gold has played a significant role as a medium of exchange and a store of value.
And even today, gold continues to play a significant role. We often use it as a hedge against currency devaluation and inflation. It is a safe haven asset during times of economic uncertainty.
But in recent times, questions have been raised against gold’s role as an inflation hedge. So let’s analyse some data to see whether gold can still play the role of inflation hedge and whether it should have a place in your portfolio.
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Buckle up, here we go!
In the last post, we discussed what is asset allocation and its importance. And we saw that gold has been ranked in the top 3 in the last 5 years based on its returns.
And at the same time, we came across many articles and people saying gold’s day of being a hedge against inflation is over. This got us thinking, so we started analysing the historical returns of gold and the inflation rate in India.
We found that in the last 60 years, gold has given a return of around 12%, and at the same time, the average inflation rate of India has been around 7.6%. (You can check this data here and here)
So, gold has been able to beat inflation easily and provided additional returns of around 4.4%. That’s crazy.
Then, we changed the time period to the last 10 years. Since 2012, gold has given a return of around 5.5% only. The average inflation rate in India was around 6%. Here, gold failed to beat inflation.
And if we change the time period more based on our convenience, we can find a 10-year period where gold gave a return of just 3.4% and the inflation rate definitely higher than that.
So, has gold lost its touch of being a hedge against inflation?
No. If you think clearly, gold has never been an asset that gives stable returns every year.
Like real estate, gold performs best in spikes. It gives good returns during high inflation periods, economic turmoil, etc. And other times, it provides a mediocre return.
But in the long term, gold has given an average return of 10 to 12%. It has helped investors and the government to beat inflation for many years.
And in recent times, the way cryptocurrency has screwed people around, more people are turning towards gold as a hedge against inflation.
Even central banks of all the countries have been adding gold to their reserves. And a survey suggests central banks are more optimistic about gold as a reserve asset. You can check the stats here and here.
Should you add gold to your portfolio?
Faced with volatile market conditions, a diversified portfolio can help you earn good returns while minimising your risks.
And if the correlation between the asset class is negative, the benefit of diversification is greater.
The correlation between gold and equity in India varies over time, but in general, they have been seen as relatively uncorrelated assets. This means that the returns on gold and equity tend to move independently of each other and do not have a strong positive or negative relationship.
However, during times of economic uncertainty or market volatility, the correlation between gold and equity can increase as investors tend to seek safe-haven assets, such as gold. In such scenarios, gold prices tend to rise, and equity prices tend to fall.
On the other hand, during periods of economic growth and stability. The correlation between gold and equity can decrease as investors shift their focus to riskier assets, such as equities, which have the potential for higher returns. In such scenarios, gold prices fall, and equity prices rise.
This combination of returns and diversifier properties (during market turmoil) means that adding gold can enhance the risk-adjusted returns of your portfolio.
You can add 5 to 10% of your portfolio to gold for diversification benefits. Remember, this is a long-term investment.
We won’t recommend investing over 10% of your portfolio in gold. Because in gold, the shorter the holding period, the higher the risk and probability of high loss/profit. The longer the holding period, the lower the risk, but returns are also less (compared to the risk taken).
Gold can never help you build wealth like equity in the long term, but it can add some stability to your portfolio during uncertain periods and help beat inflation on average.
And earlier, we discovered how Sovereign Gold Bonds (SGB) are the best way to invest in gold, as it provides an additional 2.5% interest return every year. This increases your overall return from gold investments.
If your family has high exposure to gold through physical gold, then you cannot expect a good return on investment because of the high cost of purchase. Read more about this here.
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Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
GOLDHUB – The strategic case for gold: India
Businessline – Asset class scorecard: While gold sparkles, cryptos bleed
BasuNivesh – Gold Price of Rs.18.75 in 1925 to Rs.47000 in 2020 – Should you invest?
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.