The Global & Indian Significance of Gold

The desire for gold is not for gold. It is for the means of freedom and benefit 

~ Ralph Waldo Emerson

The history of gold 

The history of gold goes back to as early as 4000 BC. A culture, centred in what is today Bulgaria in Eastern Europe, used gold to fashion decorative objects. 

While gold coins are not official currencies anymore and the Bretton Woods system has long been scrapped, Central banks around the world continue to keep a portion of their liquid reserves in gold. As of March 2022, 7% of India’s foreign exchange reserves or USD 42.5 bn is held in gold.   

So of the 118 elements in the periodic table, why have humans valued gold so much throughout history? Unlike other elements, gold is an inert element and not reactive, radioactive or corrodible. It also has a low melting point. It was scarcely available and hence came to be used in jewellery and as such started carrying sentimental value. Another important aspect is that historically the supply of gold has been too rigid due to its limited availability. This and continued demand meant that its price has continued to rise throughout history.

Now that we understand the history of why gold became so popular in our culture, let’s shift gears and understand what’s happening with gold prices at the moment.

The current state of gold 

In the present day, India is the second-largest consumer of gold. In India, gold has experienced a 10% surge in demand, reaching 210.2 tonnes in the July-September quarter, thanks to attractive prices and the ongoing festive and wedding season. In 2023, gold has stood out as the top-performing commodity, with returns of over 20% on the MCX.

A report from PTI highlighted a 7% increase in the demand for jewellery during the reviewed quarter, reaching 155.7 tonnes from 146.2 tonnes, and a 20% rise in demand for gold bars and coins, totalling. The report also noted that investments in gold bars and coins in India were at their highest for the third quarter of 2023 since 2015.

The price of gold went up by 7% or Rs 3,900 per 10 grams in the past month because of the Israel-Hamas conflict and concerns about rising inflation in the United States. Surprisingly, even with these higher prices, people continued to buy gold jewellery with 18 and 14 carats, which helped jewellery stores because they made more profit from these items.

But gold’s upward trend recently slowed down due to reduced concerns about the Israel-Hamas situation and about US inflation. These two events made gold seem less appealing, and its price dropped by more than Rs 400 on MCX in the last two trading sessions.

With Dhanteras just three days away, this drop in gold prices comes at a perfect time for people who love gold. They can take advantage of the lower prices to buy gold for the festive season or add it to their investments.

The case for Gold

Gold has become an essential part of one’s portfolio due to 2 reasons. 

Firstly, gold is a safe haven asset class. When there is turmoil in the market due to macro events and equity markets are facing a lot of volatility, gold as an asset class tends to do well. Hence it is an effective hedge against equities. Hedging is a strategy employed to reduce the risk of adverse price movements in an asset. The approach helps mitigate the losses in an asset/instrument by gains in another investment. This helps navigate market correction. The below table compares the performance of gold against the Nifty 50 performance during times of crisis.

Secondly, gold outperforms during high inflation periods. Inflation has been inthe news for quite some time now as it has become a major growth deterrent for global economies. Historically, inflation has impacted returns on equity and gold in different ways. High inflation has generally correlated with lower equity returns. On the other hand, over the long term, gold acts as an efficient hedge against inflation. The table below illustrates the performance of Nifty 50 and gold during periods of high inflation periods. We have considered wholesale price inflation for the purpose of analysis below.

Now let’s take a glance at the performance of gold over the last two decades to understand the long-term trend for the yellow metal. On average, gold has returned ~11% in the last 20 years. 

Our ethos at Windmill Capital revolves around prudent asset allocation, hence our offering – Equity & Gold smallcase. A portfolio that includes both equity and gold is an efficient way to achieve capital protection and create wealth in a sustainable fashion. The performance of gold can offset the poor performance of equities during unfavourable macro events or persistently high inflation. The Equity & Gold smallcase includes Nifty Bees and Gold Bees in the proportion of 70% and 30%. While the equity portion of the smallcase assists in growing investment, the gold part of the smallcase protects the portfolio from large drawdowns.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here – https://windmillcapital.smallcase.com/#disclosures