Author: Shail Pillay
GOLD: A STRATEGIC INVESTMENT IN 2025
In our previous article we talked about the intrinsic properties of gold that makes it an invaluable and unique asset. But let’s look at why historically it has been termed as a safe-haven and part of investors’ portfolio as a strategic asset. To start with let’s look at a key metric, Gold to Equity ratio that gives us a glimpse of how historically during periods of high uncertainty in capital markets, gold automatically becomes a key part of the portfolio:
Historical patterns indicate that when the Gold-to-Dow ratio reaches extremely low levels, gold tends to outperform equities in subsequent years. These shifts are often triggered by
- economic crises,
- inflationary environments, or
- stock market corrections, all of which are relevant factors in the current global landscape
RISK AND VOLATALITY METRICS
It is quite clear that as and when the participation in equities increases to record highs, Gold becomes an important diversification asset to safeguard against potential downside. Let’s look at some key metrics that highlight why Gold becomes the asset of choice during risky times:
As the above data suggests, Gold’s volatility is the lowest among other major asset classes like Equity, REITs and Crude Oil.
Let’s look at a few more metrics, Gold’s risk adjusted returns:
Gold comes out on top as an asset that gives high risk adjusted returns, especially during times of uncertainty given it’s high Sortino Ratio. Further, during a period of 20 years, gold has given positive rolling returns over a daily basis on more than 50% of the days, cementing its position as an attractive long-term asset.
*Sharpe Ratio: A financial metric that compares the risk-adjusted performance of an investment to a risk-free asset. A Sharpe ratio of 1.0 or higher is generally considered acceptable, while a ratio of 2.0 or higher is considered very good.
**Sortino Ratio: The Sortino ratio is a metric that measures the risk-adjusted return of an investment, focusing on downside risk. A higher Sortino ratio indicates that the investment is better at managing downside volatility.
GOLD A PERFECT HEDGE AGAINST INFLATION
“CPI Inflation reaches high of 6.2%, hovers above RBI target, despite slowing growth” – Business Standard With multiple Signs of Slowdown in the Indian economy, we are staring at high levels of sustained inflation in the economy. This is not the first time our country is staring at a high inflationary situation. Let’s revisit such periods of hyperinflation and figure out how Gold performed during those times:
As the country stares at high levels of inflation, gold has already become an attractive asset. The demand for Gold has risen at historic levels with total physical gold held by Indian gold ETFs almost doubled over the last four years to a record high of 54.5 tonnes as of October 31, 2024.
CENTRAL BANK GOLD RESERVES:
Central Banks have been heavy net purchasers of Gold for a 15th consecutive year. This trend suggests a rising concern about global economic stability, inflation and currency risks.
- RBI was the second largest buyer of gold in 2024 among central banks as of November 2024.
- Gold now makes up 10.6% of the RBI forex reserves, a noteworthy rise from 7.7% a year ago.
GOLD DURING CURRENCY DEPRECIATION:
Gold is a hedge against currency devaluation. As seen in the chart above, historically gold has always been a steady performer during times of currency depreciation.
Oct’2022- till Oct’2024, the rupee held its own and barely depreciated against the US Dollar.
However, in the last 4 months, we have seen an exodus of FPIs and FIIs from the market. This coupled with a weak trade balance meant the INR has already plummeted by 4% since October with further signs of distress.
As visible across history, whenever financial uncertainty looms, gold shines the brightest.
Oct’2022- till Oct’2024, the rupee held its own and barely depreciated against the US Dollar.
However, in the last 4 months, we have seen an exodus of FPIs and FIIs from the market. This coupled with a weak trade balance meant the INR has already plummeted by 4% since October with further signs of distress.
MARKETS AT CLOSE TO HISTORICAL HIGHS:
As of Oct’2024, India’s Market Cap to GDP stood at a 150%, which means the total value of publicly traded companies in India was 1.5 times that of the country’s GDP. This ratio is significantly higher than the last 10-year average of 94% suggesting an overheated Indian equity market.- The last time India was at these levels was back in December 2007, a peak of 146.4%.
- Over the next 5 years Gold delivered a return 210% whereas the Nifty failed to deliver any returns.
CONCLUSION
The historical analysis of the Gold-to-Equity ratio, risk-adjusted return metrics, and inflationary trends underscores gold’s importance as a strategic hedge against financial instability. In the current scenario where we are experiencing- persistent inflation even after multiple attempts by feds across the world to curb it
- rising global debt
- geopolitical uncertainties and tensions across major economies
- overvalued stock markets
As visible across history, whenever financial uncertainty looms, gold shines the brightest.
Disclaimer: The above content is for knowledge purpose only and under no circumstances is the information therein to be usedor considered as constituting an offer to buy or sell, or solicitation of any offer to buy or offer or recommendation to acquire or dispose of any security, commodity or investment or to engage in any other transaction.
