Part III: Gold – Stability in Uncertain Times
Gold has an inverse relationship with the stock markets. Historically, gold prices tend to rise when stock markets decline and vice versa. This makes this yellow metal an attractive asset for investors looking to hedge against market volatility.
Check out other articles in this series below.
Part I: Gold – More than a Pretty Metal
Part II: The Rise & Fall of the Gold Standard
Part IV: Buying Gold After the 2024 Budget: Which Option is Best for You?
Gold as a Resilient Asset Class
Gold has consistently proven to be a safe haven asset class, particularly during periods of market turmoil caused by macroeconomic events. When equity markets experience significant volatility, this asset class tends to perform well, making it an effective hedge against equities. Hedging is a strategy designed to minimize the risk of adverse price movements in one asset by offsetting potential losses with gains in another. This approach helps investors navigate market corrections more effectively. The table below illustrates the comparative performance of gold versus the Nifty 500 during various crises, highlighting gold’s resilience during these challenging times.
| Issue | Period | Period (days) | Equity multi-cap | Gold |
| Global financial crisis | Dec 2007 – Jul 2009 | 560 | -40.3% | 37.7% |
| Greek debt crisis | Feb 2011 – Aug 2012 | 531 | 0.0% | 41.7% |
| COVID 19 crisis | Jan 2020 – Jul 2020 | 184 | -13.0% | 23.6% |
| Russia- Ukraine Crisis | Feb 2022 – Mar 2023 | 409 | -4.2% | 19.2% |
Gold as a Hedge Against Inflation
Inflation represents the rate at which the prices of goods and services increase or decrease over a specific period. It reflects how much more expensive or cheaper a basket of goods and services becomes over a certain duration, such as a quarter or a year. Historically, inflation has had varying impacts on returns from equities and gold. Typically, high inflation is associated with lower equity returns. In contrast, over the long term, gold has proven to be an effective hedge against inflation.
The table below compares the performance of the Nifty 500 and gold during periods of rising inflation, using wholesale price inflation as the measure for this analysis.
| Period | Period (days) | Increase in inflation b/w 2 dates | Equity multi-cap | Gold |
| Sept 2007 – Aug 2008 | 365 | 9.1% | -6.0% | 33.1% |
| Aug 2015 – Feb 2017 | 550 | 11.5% | 5.8% | 16.4% |
| April 2021 – May 2022 | 425 | 5.4% | 13.1% | 13.6% |
Practical Insights
A portfolio that includes both these asset classes is an efficient way to achieve capital protection and sustainably create wealth. The performance of gold will offset the poor performance of equities during unfavorable macro events or persistently high inflation.
Conclusion
Incorporating gold into an investment portfolio provides a robust strategy for mitigating risks associated with market volatility and inflation. Gold’s inverse relationship with the stock market and its historical performance during periods of economic turmoil and rising inflation make it an invaluable asset for achieving capital protection. By balancing equities with gold, investors can navigate market corrections more effectively and sustain wealth creation over the long term. Embracing gold as part of a diversified investment approach ensures resilience and stability, safeguarding financial goals against the uncertainties of the global economy.
Understanding the taxation aspects further enables investors to make informed decisions about their gold investments. In our next article, we will delve into tax implications for different gold investments.
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