Long-term data shows gold behaves differently from equity and fixed income in most situations. File.
| Photo Credit: Reuters
Most investors think of portfolio in terms of equity and fixed income. Gold is an afterthought. That approach misses the point. Gold deserves a deliberate, planned allocation of about 10% of every portfolio and here is why.
A diversifier, not a bet
Long-term data shows gold behaves differently from equity and fixed income in most situations. When equity markets are under stress, gold tends to hold up or even gain. When bond yields rise sharply on inflation worries, gold does well since it is seen as a hedge against currency depreciation. This is the essence of diversification – you don’t want all assets moving in the same direction at the same time.
If you run a portfolio with equity and fixed income and allocate 10% to gold, the math works out in your favour as the overall portfolio volatility drops as gold price movements are not synchronised with the other two asset classes. Risk-adjusted or volatility-adjusted return improves. This is how portfolio construction works when you combine assets that do not move in lockstep. You are adding gold as it smoothens the ride.
Global central banks have been briskly adding gold to reserves.
Central bank buying
Sanctions, trade tensions and a more fragmented world order have made many central banks wary of holding all reserves in U.S. Treasuries. Gold held within a country’s own vaults does not carry counterparty risk the way a government bond does. This shift by central banks has been one of the steadiest sources of demand for gold over the past four years.
No trend breaking
Gold has corrected meaningfully from a peak earlier this year. Prices had run up too far too quickly, and some of that froth had to come off. What matters more is if the long-term uptrend is intact. Chartists tracking gold have a technical support line and even after this correction, that line has not been broken. A correction within an intact uptrend is very different from a trend reversal.
Rupee depreciation
Gold price is quoted in U.S. dollars and set daily by the London Bullion Market Association. The price in India is that global dollar price converted into rupees. Over the long run, the rupee had depreciated against the dollar and is likely to continue so. Every time the rupee weakens, it adds to rupee-denominated return from gold over and above whatever the dollar price of gold itself does. This is a tailwind that many investors overlook.
U.S. Fed rate and gold
Gold has an inverse relationship with the U.S. dollar (USD). When the USD strengthens, gold in dollar terms tends to soften and vice versa. The U.S. Federal Reserve is likely to raise interest rates which will act as a headwind for gold.
However, there is a limit to how much the Fed can hike as the U.S. is sitting on a huge pile of debt and higher rates mean higher cost of servicing it. At some point, the arithmetic of debt servicing and growth of economy forces a pause/reversal, in the rate cycle. Investors should see dollar-gold relationship as cyclical on gold’s prospects.
Several routes
There are several routes to gold. Sovereign Gold Bonds, offering 2.5% annual interest on top of gold’s price appreciation are no longer issued afresh but existing bonds can be bought and sold in the secondary market. Gold Exchange Traded Funds are an evergreen option — you need a demat and trading account with a broker and can buy/sell units. If you do not have a demat account, Gold Funds from mutual funds (MFs) serve the same purpose and you can invest via regular MF folio, including SIP.
More recently, a new avenue has opened up: Electronic Gold Receipts or EGRs. These are SEBI-regulated securities representing direct ownership of physical gold held in accredited vaults. You buy/sell EGRs on the stock exchange, just like a share and they sit in demat account. Each EGR is a receipt against a specific quantity of physical gold with the option to convert holdings into gold bars/coins via withdrawal request subject to charges/taxes. EGRs are available in small denominations making them accessible even to small investors. For those who want transparency of exchange-based pricing along with the comfort of an actual claim on physical gold, EGRs are worth considering as part of the 10% allocation. Whichever route, the underlying point is: gold is not a speculative add-on, it is a structural building block of a well-constructed portfolio.
(Joydeep Sen is a corporate trainer [financial markets] and author)
Published – August 31, 2026 06:14 am IST
