PERSONAL FINANCE
“The yellow metal is shining again!" said a friend of mine, who has hedged gold against his equity investments and is now counting his blessings for doing so. Hedging is a common investment strategy used to manage risk. The idea is to invest in assets that move in opposite directions but are correlated to some extent. This minimises losses when one sector declines. The gold vs. equity approach is one of the most popular methods of counteracting loss in the world of hedging.
However, my perspective is a bit different. Our love for gold is historic, and India has long been one of the world’s largest importers of the metal. In fact, we have consistently ranked second in global gold imports. With prices at an all-time high and a renewed interest in gold likely after the festive season, let us examine gold investment from a historical perspective.
In India, gold has delivered an average annual return of 8-10 per cent over the past fifty years, generally beating inflation in the long run. More importantly, gold has shown greater stability during periods of economic or financial instability. During crises, gold often outperforms the market. For example, during the 2008 financial crisis, gold provided a return of 20 per cent, and in the COVID-19 crisis, it returned 25 per cent. This happens because, in times of crisis, investors shift their investments toward gold as it is considered a safer asset.
To provide further perspective, from 2011 to 2015, gold returns averaged below 5 per cent, while equity returns were exceptionally high during the same period. In 2013, for instance, gold prices in India fell by nearly 20 per cent due to a strong dollar and high inflation. Similarly, in 2015, gold saw a 5 per cent decline. In the 1980, gold prices also fell, and from 1990 to 2000, they remained nearly stagnant.
Now, the question is: can gold become a major portion of your investment portfolio, and how does it compare to equity investments in the long run? In India, equity investments have generated long-term returns of 12-15 per cent. Although gold has provided steadier returns, particularly in times of crisis, experts agree that it should primarily be used for hedging to balance a portfolio. The general guideline is to allocate 10 per cent to gold, though this may vary by individual. A more aggressive equity investor might allocate 15 per cent, while a conservative investor may prefer 5 per cent.
The purpose of this article is to caution against short-term opportunities that might arise from casual discussions or advice from "experts" on social media. In investing, success is rarely found in short-term ideas driven by market noise. Instead, it lies in habits formed over the long term, with ideas nurtured through personal interest and an individual approach—never a hurried move.
(Email: dipankar.jakharia@gmail.com)