Gold as a Hedge in Market Downturns
Data from Zafar of Invesys Capital shows how gold has performed against the Sensex during various market cycles. Gold often acts as a hedge when equity markets fall, providing stability to an investment portfolio. For example, from February 2006 to March 2008, when the Sensex dropped by 39%, gold rose by 41%, proving to be an excellent hedge.
Historical Performance of Gold vs. Sensex
Looking at specific periods, we see that from April 1992 to July 1993, the Sensex fell by 40% while gold increased by 34.8%. Similarly, from August 1994 to January 1996, the Sensex dropped 36%, and gold went up 22%. These instances highlight how gold can counterbalance equity losses, although the extent of the hedge can vary.
Recent Trends in Gold and Equity Markets
More recent data also supports gold’s role as a hedge. Between December 2007 and February 2009, the Sensex fell by 56%, while gold gained 47%. During the period from March 2015 to February 2016, which included the demonetization phase in India, the Sensex dropped 18%, and gold rose 11%. These trends show that gold tends to increase in value when equities decline.
The Role of Currency in Gold’s Performance
One reason gold performs well during market downturns is the change in the Indian Rupee (INR) versus the US Dollar (USD). When the INR falls against the USD, the price of gold in INR often rises, enhancing its value as a hedge. This effect is even stronger if the global price of gold in USD is also increasing at the same time.
Importance of Gold Allocation in a Portfolio
Having gold in your portfolio is crucial for stability. While some suggest a 5% to 10% allocation, it might be worth considering a higher percentage. The idea is not to maximize returns but to ensure peace of mind and reduce the impact of market volatility on your overall portfolio. This approach helps you sleep better at night, knowing that your investments are more secure.
Determining the Right Amount of Gold
A simple rule of thumb is to allocate a percentage of your portfolio to gold based on your age. For instance, if you are 40 years old, consider having 20% of your net worth in gold. This is not a one-size-fits-all recommendation, so it’s essential to consult with your financial advisor to tailor this strategy to your specific needs and circumstances.
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