Gold does glitter. And returns from the yellow metal historically haven’t been the kind to scoff at. So, while equities and debt are good assets to consider while building a portfolio, gold too deserves some allocation not just from a diversification perspective, but also from a currency risk mitigation point of view.

But let’s first look at a few key characteristics of gold as an asset class.

Gold and inflation don't sync

We ran the numbers to check if the value of gold bears any correlation with consumer price inflation in the long run. It doesn’t. Gold spot returns in USD when compared to Consumer Price Inflation (CPI) data in the U.S. show low correlation with a reading of 0.4, while gold spot prices in INR display an even lower correlation with our CPI data at 0.1. So, to suggest that gold prices go up when inflation goes up and vice versa may not be correct.


Gold, however, has helped protect investors against inflation. While inflation in the U.S. over a 46-year period grew at a compounded 3.4%, gold appreciated by 5.6% leading to a 225 basis points real return. Even in India, gold spot in rupee terms has generated a healthy return of over 10% over 45-year and 27-year periods, while inflation has grown at a tad over 6% over the past 27 years. That’s a near 400 basis points real return.

So, investing in gold has historically helped combat inflation.

Gold vs Equities

Interestingly enough, gold and equities are positively correlated. Running the numbers on gold and the S&P500 (since 1984) and gold and the BSE-Sensex (since 1997) reveals a very high level of correlation between the two of about 0.9. So, the likelihood of gold gaining ground at a time of a bull run in equities is quite high.

This could be due to liquidity effects—a rise in liquidity is likely to lead to a rise in investment asset values. In terms of returns, the S&P500 has delivered a CAGR of 8.7% over 40 years, higher than the 4.9% return for gold. The BSE-Sensex too has delivered a return of 12% over 27 years, compared to about 10% for gold. The narrower spread in INR is due to the dollar effect, with the rupee seeing an erosion in value. Hence, the returns for gold in INR are higher than in $ terms.

Also, when comparing returns with equities, we must note that these aren’t necessarily similar across all periods. For instance, gold is up 103% since 2019 while the BSE-Sensex has gained only about 82%.

So, there are times when equities will outperform gold and times when the reverse will happen. Having some of your eggs in both baskets can thus help you ensure healthy returns across periods, and beat inflation.

Happy investing!

2024-04-14T08:50:10Z dg43tfdfdgfd