How much gold should you hold in your portfolio? Should it remain a conservative 5% or with gold prices on a roll, should the percentage be increased to 25-45%?
According to the ASK Private Wealth report titled “Carpe Diem,” a portfolio with an asset allocation of 50:25:25 in Equities:Bonds:Gold has yielded a return of 13.4% in the last 5 years, while an allocation of 50:45:5 in Equities:Bonds:Gold has returned 11.8% over the same period.
Additionally, over longer terms of 18 and 10 years, the portfolio with a higher gold allocation has consistently outperformed. As per the report replacing bonds with gold, to a significant extent, seems to add substantial value to portfolios.
It enhances returns without significantly increasing portfolio risks. As illustrated in the graph below, a 50:45:5 portfolio of Equities:Bonds:Gold is easily outperformed by a 50:25:25 allocation.
“We are transitioning to a long-term, or Strategic, allocation to Gold that is far greater than what has generally been the case in investor portfolios. From a 5% allocation in Balanced portfolios, we are now allocating 15% to Gold. This is not at a tactical, opportunistic level, but as a structural long-term allocation,” as per the report.
Gold prices have been rallying in 2024, reaching an all-time high of over Rs 73,000 per 10 gm—an increase of nearly 21.1% in just one year. Traditionally, gold has acted as an inflation hedge. Whenever generalized price levels in the economy rise, gold prices tend to follow suit. This behavior contrasts with several other asset classes; bond prices typically fall during high inflation, while equity prices have a mixed reaction. With inflation still posing a key risk to many economies, gold prices have tended to hold up.
Geopolitics also play a significant role. Since the end of the 2nd World War, the USD has been the world’s reserve currency. However, the USD regime has come under increased scrutiny in recent years, leading to a surge in global central bank purchases of gold. As per the World Gold Council (WGC), global Central Bank purchases of gold, which averaged around 500 tons for several years, shot up to 1000 tons in 2022 and remained at that level in 2023, as per the report.
“There is a small, if fanatical (in its belief) group with deep distrust of modern central banking. Fractional reserve banking, through which CBs can create near-infinite money supply by small changes in banking rules or a few keystrokes of their computers, ‘debases’ fiat currencies, as per this group. For a brief while, Bitcoins looked like an attractive alternative to fiat currencies – but the extreme volatility seen here precludes mainstream adoption as a medium of exchange and store of value. That leaves just gold, as a stable, trusted, liquid, and non-fiat commodity, as an alternative to fiat currencies,” as per the ASK Private Wealth report.