Why gold’s long-lasting allure can rake handsome returns

Gold continues to hold its ground as a versatile metal that has provided handsome returns over the long term to investors across different eras. The series of articles so far has extolled its virtues by citing empirical evidence through facts and figures. This article will distil the most important reasons why it makes ample sense to have gold as part of your investment portfolio.

As India enters the long-growing list of countries that are being affected by inflation, gold continues to shine as a hedge against high prices. Generally speaking prices, of gold are inversely correlated to the value of paper investments like stocks and real interest rates. And even if the gold prices fluctuate in the short term, it has maintained its value over the long term.

Even when the world economy does well, the precious metal provides decent returns in the long run. During times of currency fluctuations, when the price of say, the rupee, tumbles against the dollar, gold acts as a cushion. Its liquid nature and practical use only heightens its allure.

It is not just during times of economic distress but also during geopolitical tensions that gold scores over other asset classes. It is often referred to as a “crisis commodity”. For instance, in the recent past, when Russia invaded Ukraine, gold prices rose. Similarly, when the European Union was grappling with Brexit, prices of gold surged.

In addition to the precious metal being an important investment vehicle and an asset for central banks alongside institutional and retail investors, it has a third wing: consumer demand. According to some estimates, the use of gold in technology and jewellery accounts for 42% of annual gold demand.

Investors have traditionally considered gold as a potential source for diversifying their investment portfolio irrespective of the economic climate. There is empirical evidence too. According to research conducted by the World Gold Council, adding a 2-10% allocation to gold within a well-diversified portfolio can significantly enhance long-term returns.

The World Gold Council's report also estimates that, "gold has performed well into CB hiking cycles and has been an effective inflation hedge. Coupled with healthy jewellery and CB demand, and the potential for market volatility in a vastly changing world, the strategic rationale for gold in a portfolio — particularly as a portfolio hedge — remains compelling."

Indeed the percentage allocation comes down to the investor’s choice, savings goals and the time horizon. What separates gold from other asset classes is that generally, it is considered to be part of any well-balanced portfolio that would meet a rather wide array of investment objectives across all economic conditions.

Moneycontrol journalists were not involved in the creation of the article.