Are GOLDen times back?

In today’s economic climate, gold’s role as a financial safe haven is more pronounced than ever. Central banks in developed markets are nearing the end of increasing interest rates, and there’s a general expectation of a slowdown in the US economy towards the end of 2023. Growth in other advanced economies is also expected to be sluggish. Given this backdrop, the lag between policy changes and their economic impact is making investors nervous about a potential steep downturn.

Amidst these fears, gold has held strong, showing positive gains in the first half of the year. It’s likely to keep its value, especially as bond yields hover and the US dollar weakens. If the economy takes a turn for the worse, people are expected to buy more gold, seeking its stability. However, if things don’t go as badly as feared, or if interest rates go up sharply, some may sell off their gold. History is replete with examples where the price of Gold went high during uncertain events– be it June 2011 (European sovereign debt crisis), June 2020 (Pandemic) and again now this year (Israel-Hamas war and US Debt concerns). It is also fact that it enjoys inverse relationship with US 10-year treasury rate – be it in Feb 2000 when Treasury rate peaked and what is being seen now. Tracking the trends, the price of gold started the year at $1827 per ounce and has risen to $1957 by November.

In India, the pattern is similar, with prices moving up from about Rs55,000 per 10 grams in January 2023 to Rs60,000 currently. Indians, this increase isn’t just about market dynamics; it’s also about protecting against the drop in the value of their currency. So, having a little gold in the mix is seen as a smart move for anyone looking to safeguard their savings.

Central bank rush

Last year marked a historic moment for gold as central banks added a staggering 1,136 tonnes to their reserves. This surge in gold acquisition is not a spontaneous reaction but the continuation of a 12-year trend towards bolstering financial security with the precious metal. Central banks led the charge seeking refuge in gold’s intrinsic value as currencies experienced volatility and yield fluctuations.

Over the last few years, central banks are strategically diversifying their reserves. The inclination towards gold is a response to a complex web of macroeconomic factors. Persistent inflationary trends have prodded reserve managers to consider gold as a key element of their defence strategy. Nearly 70% of central banks have combated global inflation by upping their gold stakes.

Moreover, the geopolitical landscape has elevated gold’s status. The Russia-Ukraine conflict and the consequent sanctions, including the freezing of Russian reserves, have cast a long shadow over international relations, prompting a re-evaluation of gold’s role. The result is a unanimous expectation among central banks that gold allocations will rise in the coming years.

Gold’s appeal to individuals

Parallel to the central banks’ gold rush, individual investors have been turning their gaze towards this lustrous asset for some time now. The causes for this shift mirror those influencing the larger institutions—recession fears, banking crises, and the quest for a hedge against inflation and currency devaluation.

In a landscape where traditional investments have become unpredictable, gold stands out as a tangible asset that can be held independently of financial systems and political whims. The preference for physical gold has intensified, with investors favouring gold bars and coins over exchange-traded funds (ETFs) or derivatives. Holding physical gold is also a statement of independence and self-reliance the wake of actions such as the US freezing of Russian reserves.

Nevertheless, the rising demand for gold is not just a fad is expected to stay for years to come. The reasons are multifold, but chief among them is gold’s dual role as both a safe haven and a potential source of yield enhancement, hedge, and inflation protection and currency risk mitigation, not to mention the allure of ornamentation in countries such as India.

Mitigating risk with strategic gold allocation

Whatever its form whether physical or paper, gold provides that hedge required for any portfolio. In fact, the addition of gold to an investment portfolio can be instrumental in reducing overall risk. Standard deviation, a measure of volatility, reduces with the addition of gold in a portfolio. For example, a portfolio with a standard deviation of 12% represents higher potential volatility than one with a standard deviation of 8%. Gold, which often has a lower correlation with stocks and bonds, decreases a portfolio’s standard deviation.

Imagine a scenario where a traditional portfolio without gold has a standard deviation of 12%. Reallocating 10% of the portfolio to gold, the new composition could hypothetically reduce the standard deviation to 10%. This reduction means that the investor’s portfolio is less exposed to extreme fluctuations, thus lowering the risk profile.

During a market downturn, if equities fall by 10% and bonds by 2%, a portfolio without gold might experience heightened volatility. However, if gold prices increase by 5%, not only does the portfolio’s loss decrease, but the standard deviation reduction further indicates a smoother investment journey with fewer drastic ups and downs.

In fact, in volatile conditions, where equities may plummet by 10% and bonds might drop by 2%, a portfolio without gold could see a 7.4% decline. However, by reallocating a portion to gold, say 10%, the impact of volatility can be mitigated. For instance, if during the same period, gold prices rise by 5%—a plausible scenario during economic downturns—the portfolio’s overall loss can be reduced to 6.45%.

Table showing Gold within a portfolio acting as cushion against volatility is illustrated below.


The gold segment’s gain does not fully offset the losses from equities and bonds but provides a cushion against the downturn. This ‘hedge’ is what makes gold a safe haven. Typically gold moves inversely to market sentiments.

Let’s briefly analyse how the Equity market looks like in months ahead – in Samvat 2080

  1. Sensex and Nifty gained 9.5% in Samvat 2079, while the BSE’s small cap and midcap index gained over 34% and 31% respectively.
  2. Over the past 11 years, India has delivered excellent returns. A large part of equity returns is explained by re-rating of valuation multiples. However, history shows that if starting (purchase) valuations are high, forward returns tend to be lower. After a stellar re-rating of valuation multiples, the rally in Indian stocks is now entirely dependent on earnings growth.
  3. India among the most expensive markets globally with 21.6 P/E (trailing) lower only to Japan (25) and Argentina (26) least being Brazil at 8. Multiples is not in sync with earnings as India currently tracks ROE (basis trailing financial year) at 13% and compares much below S&P 500 at 18 and Brazil 19.
  4. 450 bps differential in EPS growth and returns indicates rerating and equity dilution as 22x trailing P/E ratio appears high for 10-12% earnings growth.

(source: Bloomberg, NSE, BSE and market reports)

Dalal Street welcomed Samvat 2080 in good spirits, as benchmark indices gained half a percentage point during the special Muhurat Trading session on Sunday the 12th of Nov 2023 (day of Diwali).

The 50-stock Nifty settled above the 19500-mark at 19525.55 points, up 100.20 points or 0.5% from the previous session. The 30-stock Sensex gained about 355 points or 0.5% to settle at 65259.45 points. While all the sectoral indices ended in the green on the BSE, those topping the list were small caps and indices representing PSU companies.

Surge on the day of Diwali reinforces that volatility is here to stay for some more time, this strategic diversification into gold can provide a more stable growth trajectory over time, appealing to risk-averse investors seeking to safeguard their capital in uncertain markets.

As we navigate the choppy waters of today’s financial systems, there’s little doubt that gold transcends mere ornamentation in India, particularly. Whether held in the vaults of nations or the personal safes of citizens, gold remains the key asset in the theatre of economic resilience. As it has done throughout history, gold will continue to offer a safe passage proving that some things never lose their lustre.

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