Gold beats Nifty in 5-year timeframe. How much should you invest? (2024)

Indians have always had a love affair with Gold. For thousands of years the yellow metal has been seen as a symbol of wealth, power and prestige in India. Beyond the status symbol, Gold is part of worship and has a deep rooted cultural significance in our society. From birth to death, men or women, rich or poor, owning gold is a goal for most Indians.

We like to own it and we also like to flaunt it.

It now turns out that central banks are starting to come around to the same view. This and other key trends create a favorable investment outlook for Gold as a strategic asset class to own in an Investment portfolio.

Gold has delivered consistent mid to high-teens returns over the past 1, 3, 5 and 7 years. In fact, gold has outperformed the Nifty 50 over the past 5 year period, delivering an 18% CAGR, and matched Nifty returns over the past 7 years. There are few asset classes that can make that claim.

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Global trends will keep driving the price of gold higher

Coming to the big picture, central banks are increasingly reducing their purchases of dollars and adding to their gold holdings. The safe haven reputation of dollar denominated assets took a body blow when the U.S. imposed sanctions and froze dollar financial assets as part of sanctions on Russia. With no alternative currency or SDR to turn to, central banks including China, India, Russia, South Africa, France, Indonesia, Turkey to name just a few have been aggressively adding to gold reserves. Gold is increasingly the central banker’s preferred currency of choice. Also noteworthy, central banks buy and hold gold, reducing the available supply.

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A second trend driving gold higher is massive quantitative easing (QE), rising debt and interest payment burdens in the U.S. and Europe. U.S. debt rose by $3.1 trillion last year. In comparison, U.S. government revenue collections are ~$4.5 trillion annually. Interest payments on debt are an estimated $870M. Over the past 2 decades, U.S. debt as a percent of GDP has ballooned from 55% to 122%. Moreover, money printing will continue. Gold is a safe haven asset against currency debasem*nt.

Finally, gold spiked higher in 2000, 2006 and 2019 as the Fed funds rate peaked. Peaks in interest rates preceded economic weakness, and led to QE. With Fed funds peaking again, and recent signs of weakening data in the U.S., QE again looks like a fair bet. Gold will rise should this scenario unfold.

A final albeit minor trend is Chinese retail buyers, who are now shifting assets into gold from real estate and equities. In time, retail in the U.S. is bound to follow. U.S. Gold ETF AUMs are one-third below their peak. Naysayers will argue about the lack of cash flows, dividends, income. But people have placed a value on gold for thousands of years. That means something. The risk reward for Gold looks attractive.

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Gold broke out of its range in early March. There have been four - 1971, 1978, 2004 and 2019 - major breakouts. Gold’s returns from each of these has been rewarding for investors (see table below).

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In 2002 and 2019, gold rose on the expectation of quantitative easing. This time around, gold’s moves are again pointing to concerns on debt, QE, and the vulnerability of the U.S. dollar. Moreover, gold provides an excellent portfolio hedge to equities as a negatively correlated asset class that delivers strong returns during bear markets.

Owning gold reduces overall portfolio volatility while providing attractive absolute returns. In 2008, gold was up 26% while equities cratered. In 2011, gold was up 31.7% while equities suffered a bear market. Gold had a strong showing in 2020, up 28.0% as equity markets struggled. In the 2000s, the S&P 500 was down 1% p.a., while gold rose 14% p.a. on an annual basis. Gold has delivered strong returns and it probably will continue to do so.

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With regards to asset allocation, the ideal portfolio construct is one with a series of non-correlated investments. Ideally, negatively correlated, so that when one class – say equities – is underperforming, other asset classes pick up the slack. Gold does precisely that. Our asset allocation recommendation for Gold for a moderate risk investor is 10% of the portfolio and our preferred route to buy gold is through Gold ETFs and Sovereign Gold Bond Funds.