Will you wait for more proof to allocate to GOLD ?

February 4, 2025 3 min read

Gold vs. Nifty: Why They Should Not Be Compared

Many investors often compare gold returns with Nifty returns, but this is not the right way to look at gold. Gold is not meant to beat equity returns over the long term. The real purpose of gold in a portfolio is to act as a hedge when there is stress in the equity markets. It is not an alternative to stocks but a way to balance risks. If you look at portfolio theory, it clearly states that investors should have assets that are not highly correlated with each other. If all assets rise and fall together, then there is no real diversification. The main idea is to have at least one asset that provides stability when others are facing volatility.

The Role of Gold in a Portfolio

Gold plays a critical role in providing a counterbalance to stocks. If stocks and gold both moved in the same direction all the time, then diversification would be meaningless. In that case, investors would just put all their money in the highest-risk asset for maximum returns. But since gold often moves opposite to stocks, it ensures that when equity markets decline, the portfolio does not suffer as much. This is why gold is important—it acts as insurance against market downturns.

The Gold vs. Nifty Chart for 2024

If we look at the chart from January 2024, we can see this inverse relationship between Nifty and gold very clearly. The white line represents Nifty, while the golden line represents gold prices. Over the year, Nifty has gained 9%, whereas gold has surged by 41%. But the more interesting point is what happens when Nifty falls. At several points where Nifty has seen declines, gold has moved up. Whether it was a drop from 24% gains to just 9%, or other corrections along the way, gold has provided strong support by rising when stocks fell. This shows how gold acts as a safe haven during market stress.

How Much Gold Should You Hold?

The percentage of gold in a portfolio depends on an investor’s risk appetite. If an investor is young and willing to take risks, they may allocate a smaller portion to gold and a larger portion to equities. But as one grows older, volatility becomes a bigger concern, and protecting the capital becomes more important. At that stage, gold allocation should be increased to reduce overall portfolio risk. A commonly suggested balance is around 30% gold and 70% equity, though this can be adjusted based on personal financial goals.

Gold Reduces Portfolio Volatility

As the investment portfolio grows in size, managing risk becomes even more important. A portfolio that experiences extreme ups and downs can be stressful, especially for long-term investors. This is where gold helps. It reduces overall volatility, ensuring that the portfolio moves in a more stable and predictable manner. Holding gold alongside equities means that even if stock prices fall sharply, the portfolio does not take as big a hit because gold cushions the decline.

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    Will you wait for more proof to allocate to GOLD ?