Gold holds a special place in the hearts of Indians, cherished not only for its cultural significance but also as a symbol of wealth and prosperity. Recent trends indicate that this affinity for gold is not just confined to individuals but is increasingly shared by central banks worldwide. Gold is seen as a strategic asset class for investors to diversify portfolios.
In a column in ET, Amrita Farmahan, the CEO of Ambit Global Private Client says that gold has shown steady returns of mid to high teens over the last 1, 3, 5, and 7 years. Over the past 5 years, gold has even outperformed the Nifty 50, with a Compound Annual Growth Rate of 18%. It has matched Nifty returns in the last five years.

Several global trends further bolster the investment thesis for gold. Central banks, including those of China, India, and Russia, are steadily increasing their gold reserves. According to Farmahan, the trust in dollar assets was shaken when the U.S. froze dollar assets due to sanctions on Russia. Without another currency option, central banks from various countries like China, India, and Russia are actively increasing their gold reserves. Gold is becoming the preferred choice for central banks, and their buying reduces the gold available in the market.
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Another factor pushing up the value of gold is the significant quantitative easing (QE) measures, along with increasing debt and interest burdens in the U.S. and Europe, she says.. Last year, U.S. debt increased by $3.1 trillion, while government revenue stood at around $4.5 trillion annually. Interest payments on debt reached approximately $870 million. Over the past 20 years, U.S. debt as a percentage of GDP has risen sharply from 55% to 122%. Additionally, the practice of money printing is expected to persist. Gold serves as a safe haven asset amid concerns of currency debasement, she adds.
In the past, gold prices surged when the Fed funds rate peaked in 2000, 2006, and 2019. These peaks in interest rates signaled economic weakness and prompted the implementation of QE. Given the expected peak in the Fed funds rate and current signs of weakening U.S. data, another round of QE seems likely. If this happens, gold prices are likely to rise once more, she says.
One more small trend is Chinese retail investors moving their money from real estate and stocks to gold. It’s expected that U.S. retail investors will do the same eventually. Currently, assets in U.S. Gold ETFs are down by a third from their highest point. Critics may question gold’s lack of regular income like cash flows or dividends. However, gold has been valued for thousands of years, indicating its enduring appeal. This suggests that the risk-reward balance for investing in gold is appealing, she adds.

Gold broke out of its usual trading range in early March. This breakout marks the fourth significant breakout since 1971, with the previous ones occurring in 1971, 1978, 2004, and 2019. Each of these breakouts has resulted in rewarding returns for investors.

In 2002 and 2019, gold saw increases due to expectations of quantitative easing. Similarly, current movements in gold prices reflect concerns about debt, quantitative easing, and the vulnerability of the U.S. dollar. Additionally, gold serves as a valuable hedge in portfolios against equities, as it typically performs well when stocks decline, providing investors with strong returns during bear markets, she says.
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Farmahan is of the view that having gold in your portfolio decreases volatility while offering appealing returns. For example, during the financial crisis of 2008, gold surged by 26% while stocks plummeted. Similarly, in 2011, gold rose by 31.7% amidst a bear market for equities. Even in 2020, amid struggles in the stock market, gold increased by 28.0%. Over the 2000s, while the S&P 500 experienced a slight annual decline of 1%, gold saw an average annual increase of 14%. These instances demonstrate gold’s track record of delivering strong returns and suggest it may continue to do so in the future.

When it comes to allocating assets, the best portfolio includes a mix of investments that don’t move in sync. It’s even better if they move in opposite directions, so if one, like stocks, isn’t doing well, others can balance it out. Gold fits this strategy perfectly. We recommend a 10% allocation to gold for moderate-risk investors. The preferred way to invest in gold is through Gold ETFs and Sovereign Gold Bond Funds, she concludes.