Gold: A Powerful Portfolio Counterweight
Gold is often misunderstood by investors, especially those who have never included it in their portfolio. A common misconception is that gold prices in India rise only because the Indian Rupee (INR) depreciates against the US Dollar (USD). However, data shows that gold’s performance in USD terms is robust on its own, dispelling this myth.
Gold’s Performance in USD Terms
A chart from Incrementum illustrates gold’s returns in USD over the past 23 years. It examines outcomes for investors who bought gold at the end of any month and held it until November 2024. The data reveals that gold delivered strong returns over most periods, averaging around 8-9% annually in USD terms.
Even during challenging years like 2011-2013, when gold faced a downturn after a prolonged bull run, the overall performance remained compelling. In recent years, returns have reached 12-14%, with some periods touching 30%. This consistent performance demonstrates gold’s value as a long-term asset.
Gold vs. S&P 500
Interestingly, gold’s returns in USD have closely matched the average performance of the S&P 500, which hovers around 9-10% annually. This parity places gold on par with one of the most celebrated asset classes in the world. For investors seeking diversification, this makes gold a reliable counterbalance to equities, particularly during times of market stress or uncertainty.
The INR Advantage for Indian Investors
For Indian investors, the returns on gold are even more pronounced. The INR tends to depreciate against the USD during periods of economic instability or when foreign funds exit Indian markets. This depreciation amplifies gold’s returns in INR terms, pushing the average annual performance to 12-13%. As a result, gold acts as a natural hedge against currency fluctuations and market downturns.
Gold and Indian Equity: A Perfect Complement
In the Indian context, gold and equities provide complementary benefits to a portfolio. Historically, gold has outperformed during periods when the stock market faced challenges, such as during major foreign fund outflows. This dynamic creates a balancing effect, ensuring that the overall portfolio remains resilient.
A great example of this synergy is the NG50-50 portfolio, which equally invests in Nifty ETFs and Gold ETFs. Over the past six to eight years, this strategy has delivered a remarkably stable equity curve, demonstrating how gold and Indian equities together can smoothen portfolio volatility.
The Bottom Line
Gold is far from just a fallback asset; it has consistently delivered strong performance in both USD and INR terms. Its ability to hedge against economic uncertainties, currency depreciation, and stock market volatility makes it an essential component of a well-balanced portfolio. Whether paired with Indian equities or used as a standalone asset, gold proves its mettle time and again.
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