Gold appears to have made a remarkable comeback recently. The upcoming festive season might have something to do with it though it is largely owing to turbulent times in the equity market, spurred by global trade woes and gloomy economic outlook. Volatility in the market has pushed investors towards the ‘safe haven’. The yellow metal1 surged 24% in the year ended September 16, 2019, and 20% in the year till date. Historically, too, gold has done well as a safe-haven asset during choppy times. This edition of Fund Insight builds a case for gold and encourages investors to add glitter to their portfolio.
Gold as an effective portfolio diversifier
Historically, gold has proven to be a safe-haven investment option as well as a good diversifier during market rally since it enjoys a very low correlation with other asset classes such as equity and debt. As seen in the table, during the 2008 financial crisis, gold prices1 rose 28%, whereas the Nifty 50 declined 52%. Similarly, in 2011, the Nifty 50 fell 24%, while gold prices rose 33%. A judicious portion of gold not only lends balance to the portfolio but also reduces risk. To verify this hypothesis, we analysed performance of diversified portfolio (equity, debt, and gold) as against standard diversification (equity and debt) and standalone asset classes. Our analysis shows that combination of equity, debt, & gold generated higher riskadjusted returns (Sharpe ratio) than other combination / standalone classes.
Notwithstanding the benefits of adding gold to the portfolio, investors should invest in the yellow metal judiciously. This is because higher exposure to gold can heighten the concentration risk of the portfolio, especially since it is a single asset class and investment product, unlike equity and debt, where investments are spread across companies and issuers. Traditionally, a minority exposure to gold of up to 5-10% of the portfolio is considered judicious. However, investors can chart their own risk-return profile and consult their financial advisor before investing in the asset class.
Investment option through paper gold
Investing in paper gold is better than hoarding it in a physical format viz., jewellery, coins and bars. Physical gold investments are exposed to the risks of theft, impurity and unfavourable prices. In contrast, paper gold offer greater price transparency, purity and negate the risks of storage and theft.