Gold is considered an important diversifier in a portfolio due to its low correlation with other asset classes, Is seen as a safe-haven asset in times of global risk-off sentiment.
It is seen as a store of wealth, a hedge against inflation, currency depreciation. Gold’s importance as a diversifier has been re-instated even as recently as in 2020.
And as it witnessed a drawdown of 11% in the S&P GSCI Gold Spot index compared to 38% drawdown by domestic equities in the COVID-19 pandemic led sell-off in markets in February-March 2020.
Gold has outperformed Indian equities in three of the last five calendar years as of 2021. Gold witnessed a sharp rally till August 2020 owing to risk-off sentiment following the outbreak of the Covid-19 pandemic.
And unprecedented liquidity support by global central banks, and also owing concerns around the U.S and China trade war in Brexit before the pandemic outbreak. Gold prices have declined 12% in 2021.
Since the peaks of August 2020 owing to risk-on sentiment following optimism over global economic recovery, positive developments around vaccine roll-outs.
Over the long term, gold prices would universally react to the pace and extent of the global economic recovery, monetary conditions in place amid the then inflation levels, and relative valuations of other asset classes.
Gold can move through long periods of underperformance as evident from its historical performance.
Follow an asset allocation-based approach. Fixed income lends stability to the portfolio and equities play a crucial role in wealth generation over the long run.
Advisable to have some allocation to gold for that diversification benefits. Allocation of other assets is in line with the recommended assets allocations which is, in turn, to depend on your risk.
In terms of investment options that consider RBI Gold Sovereign Bonds which offer a marginal interest rate on the investment and track gold prices.
In a gold exchange-traded fund what should be the ideal holding period, considering that gold prices at not moving much, should I shift from gold etfs to other equity funds.
Gold plays an important role as a diversifier in the portfolio due to its low correlation with other asset classes and is seen as a safe-haven asset.
Gold’s importance as a diversifier has been even as recently as in 2020.
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