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What better time to talk about Gold than now?
Dhanteras, a day traditionally associated with purchasing Gold, has just passed. It’s also a day when I assess the performance of Gold vs Equities. I don’t belong to the camp that considers Gold a ‘barbaric asset’, nor am I a ‘Gold bug’. I believe it deserves a place in your asset allocation, both as a strategic asset and as a hedge.
I have a few friends and many family members who swear by Gold as a core asset. They have reason to be happy! Gold matches the Nifty-50 TRI – which I am using as the equity proxy – in terms of performance over the past five years. Surprisingly, Gold also matches the Nifty-50 TRI over the past 10 years.
You can see in the chart below the performance of Gold vs Equities across various periods. Over a 15-year and 20-year period, however, Equities significantly outperformed Gold, which supports Equity’s role in dominating the wealth-creation segment of your asset allocation.
| Period | Gold | Equity (Nifty 50 TRI) |
| 1 Year | 38.1% | 28.3% |
| 3 Years | 20.1% | 12.3% |
| 5 Years | 16.4% | 16.6% |
| 10 Years | 12.4% | 16.6% |
| 15 Years | 10.9% | 12.9% |
| 20 Years | 13.2% | 15.3% |
Data as on October 31, 2024. Source: Equity – Nifty 50 TRI, Gold – WGC Gold Prices in INR
As Mutual Fund investors know, past performance is no indicator of future outcomes. Hence, we should be wary of extrapolating these outcomes.
In my calculations, I compared Gold in rupees vs the Nifty in rupees. Since Gold as an asset is priced in dollars, its returns to investors rise when the rupee depreciates against the dollar. In this way, Gold acts as a hedge against poor management of our domestic macroeconomy. If mismanagement leads to a fall in the rupee’s value versus the dollar, it adds to the returns, in rupee terms, earned by an investor in Gold.
Based on daily Gold Prices from World Gold Council. Data as on October 31, 2024
Today, with increasing concerns about poor macro management of the U.S. economy – rising fiscal deficits, debt to GDP and geopolitical shocks – Gold has a strategic role in asset allocation for a well-diversified portfolio. This applies not just to non-dollar investors.
The below table compares Gold prices to U.S. Equities (S&P 500 as proxy), both priced in dollars.
|
Period |
Gold (USD) |
Equity (S&P 500 TRI) |
|
1 Year |
36.8% |
37.9% |
|
3 Years |
15.6% |
9.1% |
|
5 Years |
12.6% |
15.3% |
|
10 Years |
8.9% |
13.0% |
|
15 Years |
6.6% |
14.2% |
|
20 Years |
9.7% |
10.6% |
Returns as on October 31, 2024. Source: Bloomberg for S&P 500 TRI and WGC for Gold Prices in USD
Gold as a strategic asset class can enhance a portfolio in three key ways:
1. Returns
2. Diversification
3. Liquidity
We have already examined the data covering long-term returns from Gold. Historically, Gold has generated positive long-term returns in both favourable and unfavourable economic conditions. Its diverse sources of demand have given gold a unique resilience and the potential to deliver returns or offer protection in various market conditions.
Gold serves as an investment that protects and enhances wealth over the long term. It is also a consumer good, thanks to demand from the jewellery and technology sectors. During periods of economic expansion, the pro-cyclical consumer demand supports its performance.
Combined, these factors enable Gold to provide stability across a range of economic environments. Further, during periods of economic uncertainty, counter-cyclical investment demand drives the price of gold up.
In extremely volatile times, Gold’s negative correlation to equities and other risk assets intensifies as these assets sell off. The Global Financial Crisis (GFC) is a case in point. While equities and other risk assets tumbled in value alongside – hedge funds, real estate and most commodities, which were long deemed portfolio diversifiers – Gold held its ground and increased in price. From December 2007 to February 2009, Gold rose by 20.3% in U.S. dollars. During the same period the S&P 500 dropped 50.4% and the Nifty dropped 52%.
In the more recent sharp equity market pullbacks of 2020 and 2022, Gold’s performance also remained positive, demonstrating its resilience in times of market stress.
The Gold market is large, global and highly liquid. It is also more liquid than several major financial markets, including the euro/yen and the Dow Jones Industrial Average.
Average daily trading volumes over the last year in U.S. dollars*
Source: WGC. *Based on estimated average daily trading volumes from 1 January 2023 to 31 December 2023, except for currencies that correspond to April 2022 daily volumes due to data availability. **Gold liquidity includes estimates on OTC transactions and published statistics on futures exchanges, and gold-backed exchange-traded products.
Furthermore, Gold is considered a universal currency, valid across boundaries and geographies. With global acceptability and transparent pricing, Gold adds liquidity to a portfolio.
As a result, with the risk of expropriation of sovereign assets has led many central banks to increase their Gold holdings to diversify, as much as possible, away from USD-denominated securities. This trend is reflected in the pattern of Gold purchases by central banks in recent times.
Source: WGC - Central bank gold statistics September 2024
The purpose of this note is not to make a case for buying Gold today, after its brilliant run over the past 12 months! Rather it is to make the case that you should consider Gold as a part of your strategic asset allocation.
Vetri Subramaniam is the Chief Investment Officer at UTI Asset Management Co. Ltd. He holds a B.Com degree from University of Madras and a Post Graduate Diploma in Management from Indian Institute of Management, Bangalore. He joined UTI AMC as Head of Equity in January 2017 and assumed the role of Chief Investment Officer from August 2021. Prior to joining UTI, he was associated with Invesco Asset Management Private Limited, Motilal Oswal Securities Limited, Kotak Mahindra Asset Management Company Limited, SSKI Investor Service Private Limited and Kotak Mahindra Finance Limited.
The reference for stocks used in this document is for illustrative purposes only and should not be construed as advice. The reference stocks are not an endorsement by UTI Mutual Fund and UTI Asset Management Company Limited for their soundness or a recommendation to buy or sell these stocks at any point in time. The performance of stocks would ultimately depend on various factors such as prevailing market conditions, global political scenario, exchange rate etc. Investors are requested to note that there are various factors (both local and international) that can have impact on the future performance and expectations of any company. There is no assurance or guarantee of any company being able to sustain its performance in future and the above information should not be construed as a research report or a recommendation to buy or sell any security.
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