VR Logo

The golden era comes back

As equity markets have tanked, gold has rallied. We assess if there is a case for a gold component in your portfolio

The golden era comes back

The gravity-defying rally in gold has renewed investor interest in the shiny metal. At a time when other asset classes are struggling, gold has delivered over 40 per cent over the last one year. That's very much in line with its image of being a safe haven. As a result, gold-fund assets have spiked after years of sustained decline (see the graph below). We compare gold's historical performance against equity and fixed income to see how promising investing in gold has been.

Gold as a wealth creator
To assess gold's long-term performance, we compared the 15-year rolling returns of gold with those of multicap funds (see the graph below). Clearly, equity funds have consistently outpaced gold by a wide margin. The only exception is the recent phase, when equity markets have registered one of their steepest falls ever in a short time span. Hence, equity has proved to be a far superior asset class for long-term wealth creation.

Gold as a protector of value
Next we wanted to check if gold indeed acts as a 'safe haven' as it is popularly thought to be. The graph below shows that in almost every calendar year when Sensex has been in red, gold has performed better. So, it does act as a hedge against equity volatility.

Implications for your portfolio
On its own, gold may not be a rewarding asset, but what happens when you have a gold component in your portfolio? To find out, we created three portfolios: one with only equity; one with 80 per cent equity and the rest gold; and one with 80 per cent equity and the rest fixed income. The last two were rebalanced yearly, at the beginning of the calendar year, to restore the original 80:20 allocation. As you can see in the graph below, gold has helped limit losses well as compared to fixed income.

An SIP of Rs 5,000 in each of the portfolios mentioned above would have yielded best results with the equity-gold combination, that too with less volatility, as measured by standard deviation. However, do appreciate that the outperformance of this portfolio over the equity-only portfolio is mainly because of the abrupt fall in the market since March 2020 and the commensurate rally in gold. A recovery in the stock market can again tilt the balance in favour of equity.

Should you invest in gold?
Value Research has long maintained that gold is an unproductive asset class, whose value is derived more from belief rather than economic sense. Unlike equity or bonds or deposits, the money that you invest in gold does not contribute to economic growth. However, one can't refute the observations above either. Gold has repeatedly proved its worth in limiting downside when equity markets are panicky. Therefore, if abrupt falls in equity market make you anxious, a small allocation to gold can help allay your fears.

Apart from buying physical bullion, you can invest in gold through gold ETFs, gold funds and Sovereign Gold Bonds (SGBs). Please note that gold jewellery isn't a sound investment as there are many other charges built into it. It should be seen as a consumption item.

To invest in gold ETFs, you must have a trading and demat account. Gold funds can be bought the way you would buy a normal mutual fund. SGBs are the best alternative. Though they have an eight-year maturity (with premature exit possible after the fifth year), an interest rate of 2.5 per cent and exemption from capital-gains tax are a sweetener. The table below lists the issuances of SGBs in the first half of this financial year.