The US Federal Reserve has cut interest rates, which will, in turn, weaken the dollar as borrowing costs fall. Since gold is priced in US dollars globally, a weaker greenback makes gold cheaper in other currencies, further driving up demand. However, gold has already appreciated by 32 per cent in US dollar terms (and 19.8 per cent in rupee terms) this year so far in anticipation of this scenario. So, is it still a good time to invest in gold?
Historically, gold has been one of the most sought-after asset classes in India, serving as a key means of wealth transmission alongside land holdings. Over the past 20 years, gold has delivered an average annualised return of about 13.8 per cent, closely trailing the BSE Sensex’s impressive 14.1 per cent returns. Gold often demonstrates an inverse relationship with the stock market, providing a crucial counterbalance during turbulent times. However, over longer periods of time, as in case of 20-year duration, the returns tend to converge.
| 20-year CAGR Returns | ||||
| Gold (24K) | BSE Sensex | Crude Oil Prices | Silver | Inflation as of Sept 2024 |
| 13.8% | 14.1% | 6.0% | 11.2% | 5.49% |
The appeal of gold lies in several key factors. First, it is widely regarded as a safe haven asset, holding its value even during economic downturns. The precious yellow metal is universally recognised and cannot be devalued through overprinting like currency notes. It serves as an effective hedge against inflation, and compared to stocks and other securities, gold prices are generally less volatile, making it a reliable choice.
Also read | Why buying Sovereign Gold Bonds at a premium in secondary markets may not be a good idea
Moreover, gold’s liquidity makes it an attractive option for investors seeking immediate access to cash. As a time-tested store of value, it remains a popular asset class among major economies.
| GOLD AND SENSEX RETURNS | ||||
| Comparative analysis of absolute returns and annual CAGR growth of gold & BSE Sensex | ||||
| Gold (24k) | BSE Sensex | |||
| Dec 1970 - Dec 1980 | 622.8% | 21.9% | - | - |
| Dec 1980 - Dec 1990 | 140.6% | 9.2% | 607.2% | 21.6% |
| Dec 1990 - Dec 2000 | 37.5% | 3.2% | 278.9% | 14.2% |
| Dec 2000 - Dec 2010 | 320.5% | 15.4% | 416.3% | 17.8% |
| Dec 2010 - Dec 2020 | 163.0% | 10.2% | 132.8% | 8.8% |
| Dec 2020 - Oct 2024 | 60.8% | 13.2% | 67.6% | 14.4% |
| Gold and Sensex Returns post COVID-19 | ||||
| Dec 2020 – Dec 2021 | 0.1% | 0.1% | 22.0% | 22.0% |
| Dec 2021 – Dec 2022 | 8.1% | 8.1% | 4.4% | 4.4% |
| Dec 2022 – Dec 2023 | 24.0% | 24.0% | 18.7% | 18.7% |
| Dec 2023 – Oct 2024 | 19.8% | 24.2% | 10.80% | 13.1% |
| Source: Bank Bazaar, Investing.com and BSE India. Current data is as of October 25, 2024 |
Historically, when the US Federal Reserve has cut interest rates, it has often been followed by declines in the stock markets. Be it in 2001 during the dot.com bust and 9/11 crisis, be it 2008 during the U.S. housing market crash leading to the global financial crisis or a mid-cycle adjustment followed by Covid-19 pandemic. If history repeats itself, with Fed pivoting now, it will prove beneficial to have gold in one’s portfolio to protect from the potential downturn in equities.
Also read | Gold ETFs see record volume on the exchanges YTD, almost double 2023 volumes
Central banks are buying gold too
A key indicator of the strength in gold lies in the increasing central bank purchases. In January-June 2024, central bank gold demand totalled 483 tonnes, the highest first half year since 2000, according to the World Gold Council (WGC). Gold accounts for 5 per cent of the People’s Bank of China’s (PBoC) total reserves, the highest share since 1996. Reserve Bank of India’s gold reserves sit at 841 tonnes, or 10 per cent of total reserves.
Apart from inflation hedge, a major reason why central banks are hoarding up on gold is because there is no default risk. Geopolitical diversifier and performance during times of crisis, are some of the other main reasons behind central banks' buying spree, as per WGC.
| GOLD AND ECONOMY | ||||
| Comparative analysis of gold prices with relative comparability to understand the working of an economy such as India | ||||
| Gold 24K (Rs) | BSE Sensex | Inflation in India | Crude Oil Prices | |
| 2000 | 4,400 | 3,972.12 | 3.48 | $23.87 |
| 2010 | 18,500 | 20,509.09 | 9.47 | $94.75 |
| 2020 | 48,651 | 47,751.00 | 4.59 | $51.80 |
| 2021 | 48,720 | 58,253.82 | 5.66 | $77.78 |
| 2022 | 52,670 | 60,840.74 | 5.72 | $85.91 |
| 2023 | 65,330 | 72,240.26 | 5.69 | $77.05 |
| 2024 (YTD) | 78,246 | 80,065.16 | 5.49 | $75.79 |
| Source: Bank Bazaar, Investing.com and BSE India. Current data is as of October 25, 2024 |
So whether you’re looking to safeguard your wealth or diversify your portfolio, gold remains a strategic asset that should not be overlooked. For moderately conservative investors, a 5-10 per cent allocation toward gold is ideal, while more conservative investors might consider up to a 20 per cent allocation.
In such volatile times, with heightened geopolitical tensions and pockets of over-valuation in domestic equity markets, gold is a vital component to make a well-rounded portfolio.
(The author is Chief Business Officer, PL Wealth Management)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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