Role of Gold : US Markets perspective
Gold has long been considered a safe-haven asset and a store of value during times of economic uncertainty. In this article, we will discuss the performance of gold during recessions and its role as a hedge in investment portfolios.
A chart provided by the Twitter account VC Elements showcases the performance of gold during recessions in the US market over the past 50 years. It is evident from the chart that whenever the S&P 500, a benchmark index for the US stock market, has underperformed, gold has shown remarkable resilience and often experienced substantial growth.
For example, during the period from 2000 to 2008, the S&P 500 showed no significant performance, whereas gold experienced considerable upward movement. Similarly, during the COVID-19 pandemic, when the market suffered a significant decline, gold once again performed remarkably well.
This data points to the fact that gold plays a vital role as a contrarian investment to mitigate the effects of stock market volatility. This inverse correlation between gold and equities holds true not only in the US market but also in the Indian context.
Role of GOLD : Indian Markets Perspective
Analyzing the last 22 years of data in the Indian market, it becomes apparent that gold is not in direct competition with equities in terms of generating high returns. Instead, gold serves as an insurance and a hedge against market volatility.
During periods when the Nifty, the benchmark index for the Indian stock market, outperforms gold, the yellow metal safeguards against potential downside risks. This was evident during the 2008-2013 period when the Nifty remained stagnant while gold experienced substantial growth.
Similarly, during the recent COVID-19 market fall, while the Nifty declined by around 25-30%, gold demonstrated its role as a safe-haven asset by performing well. Thus, gold acts as a valuable portfolio diversification tool in the Indian market.
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While gold as an asset class displays inverse correlation to equities globally, the effect is accentuated in the Indian context due to the additional weakness of the currency. When the equity market is not performing well, it is likely that foreigners are selling out their investments, resulting in a fall in the Indian rupee against the US dollar.
This depreciation of the currency adds an extra boost to the price of gold in India. Therefore, Indian gold not only benefits from its inherent properties but also from the weakening of the currency during times of economic distress.
How much to allocate to GOLD ?
Determining the appropriate allocation of gold in an investment portfolio is subjective and depends on individual preferences and risk tolerance. However, a general rule of thumb suggests allocating a percentage equal to your age divided by two as a percentage of your net worth.
For instance, if you are 50 years old, having 25% of your net worth in gold is recommended as a hedge against market volatility. It is important to note that this is just one perspective, and some investors may choose to allocate a smaller percentage, such as 5% or 10%, to gold.
However, in an increasingly uncertain world where economic uncertainties are growing each year, having a fallback option like gold can provide stability and protect wealth. Ultimately, the decision on the allocation of gold should be made based on an individual’s risk appetite and financial goals.
Gold has consistently demonstrated its role as a safe-haven asset during times of economic uncertainty. Its inverse correlation to equities makes it an attractive option for portfolio diversification. In the Indian context, the impact of gold is further enhanced due to the additional weakness of the currency during market downturns.
While the allocation of gold in an investment portfolio is subjective, having a percentage equal to your age divided by two is often considered a prudent strategy. However, individual investors should carefully assess their risk tolerance and financial goals before deciding on the appropriate allocation of gold.
In a world where uncertainties continue to rise, having a hedge like gold can provide a sense of security and stability. Therefore, considering the historical performance of gold during recessions and its unique properties, it is worth evaluating gold as a valuable addition to your investment portfolio.
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