India edition

Sectors: Investment

What makes gold a strategic asset?

Gold benefits from diverse sources of demand: as an investment, a reserve asset, jewellery, and a technology component. It is highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its value over time.

 

Gold can enhance a portfolio in four key ways:

Returns

Diversification

Liquidity

Portfolio performance

 

Extraordinary times with extraordinary opportunities 

2020 posed unprecedented challenges to investors as the first global pandemic in a century ravaged the world economically and socially.

COVID-19 significantly increased uncertainty by compounding existing risks and creating new ones. The rollout of new vaccines at the end of last year fuelled optimism that the worst was over. Yet the pandemic and the ensuing policy response from governments will likely have unintended consequences for, and create structural changes to, asset allocation strategies. 

Global central banks have effectively taken interest rates to zero, driving nearly all sovereign debt to negative real yields. With less opportunity for yield across fixed income assets – especially those of shorter duration or higher quality – investors will likely continue to shift exposure to riskier assets. This has pushed many global stock markets to extreme levels on numerous valuation metrics and – importantly - has also served to increase the risk profile of most investment portfolios.

Additionally, many countries have made it clear they will continue to enact sizeable fiscal policy measures to tackle the economic impact of COVID-19, along with expanding budget deficits and balance sheets. 

We believe these actions - in combination with the current environment have made gold increasingly relevant as a strategic asset. Not only could investors benefit from gold’s role as a diversifier amid ballooning budget deficits, inflationary pressures, and potential market corrections from already high equity valuations, but they may also see additional support as gold consumption will likely benefit from the nascent economic recovery, especially in emerging markets (see 2021 Gold Outlook).

ESG considerations

Over recent years, investors have increasingly looked to integrate environmental, social and governance (ESG) considerations as part of their investment process. For example, 89% of European investors now take ESG factors into account when they make investment decisions.2 This increased emphasis on ESG reflects increasing pressure for businesses to actively manage ESG risks. It also emphasises that good ESG performance could lead to better long-term financial performance.3 This shift towards a greater integration has important implications for gold, which needs to demonstrate that it is produced and sourced responsibly, as well as the role that gold can play in supporting ESG objectives within a portfolio (Focus 2: Gold as an ESG investment).4

The increased relevance of gold

Institutional investors5 have embraced alternatives to traditional investments such as equities and bonds in pursuit of diversification and higher risk-adjusted returns. The share of non-traditional assets, such as hedge funds, private equity funds or commodities, among global pension funds increased from 7% in 1998 to 26% in 2020 – this figure is 30% in the US (Chart 1).6

Gold allocations have been recipients of this shift. Investors increasingly recognise gold as a mainstream investment; global investment demand has grown by an average of 15% per year since 2001 and the gold price has increased almost eleven-fold over the same period.7

 

Chart 1: Alternative investments including gold have become a key portfolio strategy

Alternative investments including gold have become a key portfolio strategy

Institutional investors continue to add alternative investments, including gold, to their portfolios*

Alternative investments including gold have become a key portfolio strategy
Institutional investors continue to add alternative investments, including gold, to their portfolios*
Sources: World Gold Council, Willis Towers Watson; Disclaimer *As of December 2020. See Willis Towers Watson, Global Pension Asset Study 2021.

Sources: World Gold Council, Willis Towers Watson; Disclaimer

 

 

Gold performance has been strong in recent decades, supported by key structural changes

 

Gold performance has been strong in recent decades, supported by key structural changes

Gold performance has been strong in recent decades, supported by key structural changes
Source: World Gold Council

Sources: World Gold Council; Disclaimer

 

Gold’s strategic role

Our analysis shows gold is a clear complement to equities, bonds and broad-based portfolios. A store of wealth and a hedge against systemic risk, currency depreciation and inflation, gold has historically improved portfolios’ risk-adjusted returns, delivered positive returns, and provided liquidity to meet liabilities in times of market stress. 

A source of returns

Investors have long considered gold a beneficial asset during periods of uncertainty. Historically, it has generated long-term positive returns in both good and bad economic times. Looking back almost half a century, the price of gold in US dollars has increased by an average of nearly 11% per year since 19719  when the gold standard collapsed.10 Over this period, gold’s long-term return is comparable to equities and higher than bonds.11 Gold has also outperformed many other major asset classes over the past two, five, and 10 years(Chart 2 and Chart 3). 

This duality reflects the diverse sources of demand for gold and differentiates it from other investment assets. Gold is often used to protect and enhance wealth over the long term as it is no one’s liability, and it operates as a means of exchange due to its global recognition.

Gold is also in demand via the jewellery market, valued by consumers across the world. And it is a key component in electronics.12 These diverse sources of demand give gold a particular resilience: the potential to deliver solid returns in various market conditions (Chart 7, p6).

 

Chart 2: Gold has outperformed most broad-based portfolio components over the past decade*

Gold has outperformed most broad-based portfolio components over the past decade*

Average annual return of key global assets in Indian Rupees*

Gold has outperformed most broad-based portfolio components over the past decade*
Average annual return of key global assets in rupees*
*Returns from 31 December 2010 to 31 December 2020. Source: Computations in rupees of total return indices for LBMA Gold Price PM USD, S&P BSE Sensex Total Return Index, Bloomberg Barclays 1-3 Year Indian Treasury Total Return Index Hedged INR, S&P BSE India Government Bond Index Total Return, CRISIL AAA Long Term Bond Index, MSCI World Index, MSCI Emerging Net Total Return USD Index.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Returns from 31 December 2010 to 31 December 2020. 
Computations in rupees of total return indices for LBMA Gold Price PM USD, S&P BSE Sensex Total Return Index, Bloomberg Barclays 1-3 Year Indian Treasury Total Return Index Hedged INR, S&P BSE India Government Bond Index Total Return, CRISIL AAA Long Term Bond Index, MSCI World Index, MSCI Emerging Net Total Return USD Index.

On Goldhub.com: Gold returns.

 

Chart 3: Gold has performed well over the past decade, despite the strong performance of risk assets

Gold has performed well over the past decade, despite the strong performance of risk assets

Average annual return over the past five and ten years

Gold has performed well over the past decade, despite the strong performance of risk assets
Average annual return over the past ten, five, and two years*
*Returns in rupees from 31 December 2010 to 31 December 2020. See Chart 2 for respective indices. Source: On Goldhub.com see: Gold returns.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Returns in rupees from 31 December 2010 to 31 December 2020. See Chart 2 for respective indices.

On Goldhub.com: Gold returns

 

Beating inflation, combating deflation

Gold has long been considered a hedge against inflation and the data confirms this. The average annual return of 11% in rupees over the past 40 years, has outpaced the Indian and world consumer price indices (CPI).13

Gold also protects investors against high and extreme inflation. In years when inflation was higher than 7%, gold’s price increased 11% per year on average (Chart 4). Over the long term, therefore, gold has not just preserved capital but helped it grow. 

Research also shows that gold should do well in periods of deflation.14 Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster gold demand.

 

Chart 4: Gold historically rallies in periods of high inflation, outperforming broad-based commodities

Chart 4: Gold historically rallies in periods of high inflation, outperforming broad-based commodities

Gold and commodity returns in rupees as a function of annual inflation*

Chart 4: Gold historically rallies in periods of high inflation, outperforming broad-based commodities
Gold and commodity returns in rupees as a function of annual inflation*
*Based on y-o-y changes for the LBMA Gold Price PM, Bloomberg Commodity Index and Indian CPI between December 1979 and 31 December 2020 in rupees, based on available data. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*Based on y-o-y changes for the LBMA Gold Price PM in Indian Rupees, Bloomberg Commodity Index and Indian CPI between December 1981 and 31 December 2020 in rupees, based on available data.

 

Outperforming fiat currencies

Investor demand has been boosted by persistently low interest rates and concerns about the outlook for the dollar, which affect the perceived opportunity cost of holding gold.

Historically, major currencies were pegged to gold. That changed with the unravelling of the US gold standard in 1971 and the eventual collapse of the Bretton Woods system.15 Since then, with few exceptions, gold has significantly outperformed all major currencies and commodities as a means of exchange (Chart 5). This outperformance was particularly marked immediately after the end of the gold standard. A key factor behind this robust performance is that the supply growth of gold has changed little over time – increasing by approximately 1.4% per year over the past 20 years.16

By contrast, fiat money can be printed in unlimited quantities to support monetary policy, as exemplified by the quantitative easing measures in the aftermath of the Global Financial Crisis (GFC).17 In recent years, the rapidly increasing global money supply and a low to negative rate environment have fostered an optimal environment for gold to outperform global sovereign debt, such as US treasuries and to track the global money supply 
 (Chart 6 p6).

 

Chart 5: The purchasing power of major currencies and commodities has significantly eroded relative to gold

The purchasing power of major currencies and commodities has significantly eroded relative to gold

Value of currencies and broad commodities relative to gold (January 2000 = 100)*

The purchasing power of major currencies and commodities has significantly eroded relative to gold
Value of currencies and broad commodities relative to gold (January 2000 = 100)*
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council *As of 31 December 2020. Relative value between ‘gold’: LBMA Gold Price PM, ‘commodities’: Bloomberg Commodity Index, and major currencies since 2000. Value of commodities and currencies measured in ounces of gold and indexed to 100 in January 2000. On Goldhub.com see: Gold prices.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*As of 31 December 2020. Relative value between ‘gold’: LBMA Gold Price PM, ‘commodities’: Bloomberg Commodity Index, and major currencies since 2000. Value of commodities and currencies measured in ounces of gold and indexed to 100 in January 2000. 

On Goldhub.com see: Gold prices.

 

 

Chart 6: Gold prices have tracked the expansion of global money supply and outpaced T-bills over time

Gold prices have tracked the expansion of global money supply and outpaced T-bills over time

Global M2 growth, US 3m T-bill total return, gold price*

Gold prices have tracked the expansion of global money supply and outpaced T-bills over time
Global M2 growth, US 3m T-bill total return, gold price*
Sources: Bloomberg, ICE Benchmark Administration, Oxford Economics, World Gold Council *As of 31 December 2020. Data starts in 1973 due to data availability. Global M2 is first calculated by aggregating the available universe of individual country M2 in US dollars (excluding Venezuela due to data quality) as provided by Oxford Economics. The resulting aggregate is then re-based to 100 on January 1973. US 3m T-bill total returns constructed using cumulative returns based on 3-month US T-bill yields and also rebased to 100 on January 1973. Gold based on the LBMA Gold Price PM USD.

Sources: Bloomberg, ICE Benchmark Administration, Oxford Economics, World Gold Council; Disclaimer

*As of 31 December 2020. Data starts in 1973 due to data availability. Global M2 is first calculated by aggregating the available universe of individual country M2 in US dollars (excluding Venezuela due to data quality) as provided by Oxford Economics. The resulting aggregate is then re-based to 100 on January 1973. US 3m T-bill total returns constructed using cumulative returns based on 3-month US T-bill yields and also rebased to 100 on January 1973. Gold based on the LBMA Gold Price PM USD.

 

Diversification that works

The benefits of diversification are widely acknowledged – but it is hard to find effective diversifiers. Many assets become increasingly correlated as market uncertainty rises and volatility is more pronounced, driven in part by risk-on/risk-off investment decisions. As a result, many so-called diversifiers fail to protect portfolios when investors need them most. 

Gold is different in that its negative correlation to equities and other risk assets generally increases as these assets sell off (Chart 7). The GFC is a case in point. Equities and other risk assets tumbled in value, as did hedge funds, real estate and most commodities, which were long deemed portfolio diversifiers. Gold, by contrast, held its own and increased in price, rising 57% in rupees from December 2007 to February 2009.18 And in the most recent sharp equity market pullbacks of 2018 and 2020, gold performance remained positive.19

This robust performance is perhaps not surprising. With few exceptions, gold has been particularly effective during times of systemic risk, delivering positive returns and reducing overall portfolio losses (Chart 8, p7). Importantly too, gold allows investors to meet liabilities when less liquid assets in their portfolio are difficult to sell, or possibly mispriced. 

But gold’s correlation does not just work for investors during periods of turmoil. It can also deliver positive correlation with equities and other risk assets in positive markets, making gold a well-rounded efficient hedge (Chart 9, p7), (see Gold: an efficient hedge).

This dual benefit arises from gold’s dual nature: as both an investment and a consumer good (Chart 18, p15). As such, the long-term performance of gold is supported by income growth. Our analysis bears this out, showing that when equities rally strongly, their correlation to gold can increase. This is most likely driven by a wealth-effect supporting gold consumer demand, as well as demand from investors seeking protection against higher inflation expectations.

 

Chart 7: Gold has been more negatively correlated with equities in extreme market selloffs than commodities

Gold has been more negatively correlated with equities in extreme market selloffs than commodities

Correlation between gold and Indian equity returns in various environments of equity market performance since 1984*

Gold has been more negatively correlated with equities in extreme market selloffs than commodities
Correlation between gold and Indian equity returns in various environments of equity market performance since 1984*
*As of 31 December 2020. Correlations computed using weekly returns in rupees based on the LBMA Gold Price PM since January 1984 due to availability of data. The top bar corresponds to the unconditional correlation over the full period. The middle bar corresponds to the correlation conditional on BSE Sensex weekly return falling by more than two standard deviations (or ‘σ’) respectively, while the bottom bar corresponds to the BSE Sensex weekly return decreasing by more than three standard deviations. The standard deviation is based on the same weekly returns over the full period. Source: On Goldhub.com see: Gold correlation.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*As of 31 December 2020. Correlations computed using weekly returns in rupees based on the LBMA Gold Price PM since January 1984 due to availability of data. 
The top bar corresponds to the unconditional correlation over the full period. The middle bar corresponds to the correlation conditional on BSE Sensex weekly return falling by more than two standard deviations (or ‘σ’) respectively, while the bottom bar corresponds to the BSE Sensex weekly return decreasing by more than three standard deviations. The standard deviation is based on the same weekly returns over the full period. 

Source: On Goldhub.com: Gold correlation.

 

Chart 8: The gold price tends to increase in periods of systemic risk

The gold price tends to increase in periods of systemic risk

US equities, treasuries and gold versus the VIX index*

The gold price tends to increase in periods of systemic risk
US equities, treasuries and gold versus the VIX index*
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council *As of 31 December 2020. Return computations in US dollars for ‘US equities’: S&P 500 Index; ‘US treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM; and ‘VIX’: Cboe VIX Index. The VIX is available only after January 1990. For events occurring prior to that date annualised 30-day S&P 500 volatility is used as a proxy. Dates used: Black Monday: 9/1987 - 11/1987; LTCM: 8/1998; Dot-com: 3/2000 - 3/2001; September 11: 9/2001; 2002 recession: 3/2002 - 7/2002; global financial crisis (GFC): 10/2007 - 2/2009; Sovereign debt crisis I: 1/2010 - 6/2010; Sovereign debt crisis II: 2/2011 - 10/2011; Brexit: 23/6/2016 – 27/6/ 2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 – 31/3/2020.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*As of 31 December 2020. Return computations in US dollars for ‘US equities’: S&P 500 Index; ‘US treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM; and ‘VIX’: Cboe VIX Index. The VIX is available only after January 1990. For events occurring prior to that date annualised 30-day S&P 500 volatility is used as a proxy. Dates used: Black Monday: 9/1987 - 11/1987; LTCM: 8/1998; Dot-com: 3/2000 - 3/2001; September 11: 9/2001; 2002 recession: 3/2002 - 7/2002; global financial crisis (GFC): 10/2007 - 2/2009; Sovereign debt crisis I: 1/2010 - 6/2010; Sovereign debt crisis II: 2/2011 - 10/2011; Brexit: 23/6/2016 – 27/6/ 2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 – 31/3/2020.

Asset Performance during market
sell-off*
Performance during market
recovery*
  Average Median Average Median
Gold 10% 7% 25% 6%
US treasuries 11% 10% 13% 5%

*Average and median returns based on time horizons in Charts 8 and 9.
Source: Bloomberg, World Gold Council

 

Chart 9: Gold prices perform well following the period after a systemic selloff and its subsequent recovery

Gold prices perform well following the period after a systemic selloff and its subsequent recovery

Performance of gold and treasuries from the market trough (bottom) to the market recovery point (equity market levels before the systemic selloff)

Gold prices perform well following the period after a systemic selloff and its subsequent recovery
Performance of gold and treasuries from the market trough (bottom) to the market recovery point (equity market levels before the systemic selloff)
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council * As of 31 December 2020. Return computations in US dollars for ‘US treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM. Dates used are based off the end dates of Chart 8. Post Black Monday: 11/1987 - 6/1989; Post LTCM: 8/1998 - 11/1998; Post dot-com: 3/2001 – 5/2007; Post 9/11: 9/2001 – 11/2001; Post 2002 recession: 7/2002 – 11/2004; Post GFC: 2/2009 - 1/2013; Post sovereign debt crisis I: 6/2010 - 10/2010; Post sovereign debt crisis II: 10/2011 – 2/2012; Post Brexit: 6/2016 - 7/2016; Post 2018 pullback: 12/2018 – 6/2019; Post 2020 pullback: 3/2020 – 7/2020. **The bar is truncated for the Dot-com bubble recovery due to its extreme differential between others and visibility.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

* As of 31 December 2020. Return computations in US dollars for ‘US treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM. Dates used are based off the end dates of Chart 8. Post Black Monday: 11/1987 - 6/1989; Post LTCM: 8/1998 - 11/1998; Post dot-com: 3/2001 – 5/2007; Post 9/11: 9/2001 – 11/2001; Post 2002 recession: 7/2002 – 11/2004; Post GFC: 2/2009 - 1/2013; Post sovereign debt crisis I: 6/2010 - 10/2010; Post sovereign debt crisis II: 10/2011 – 2/2012; Post Brexit: 6/2016 - 7/2016; Post 2018 pullback: 12/2018 – 6/2019; Post 2020 pullback: 3/2020 – 7/2020.
**The bar is truncated for the Dot-com bubble recovery due to its extreme differential between others and visibility.
 

 

A deep and liquid market

The gold market is large, global and highly liquid. 

The gold market is large, global and highly liquid. 
We estimate that physical gold holdings by investors and central banks are worth approximately 349tn rupees, with an additional 85tn rupees in open interest through derivatives traded on exchanges or the over-the-counter (OTC) market (Chart 16a p14).

The gold market is also more liquid than several major financial markets, including Indian equities and bonds, US T-bills, euro/yen and UK Gilts, while trading volumes are similar to those of the S&P 500 (Chart 10). Gold’s trading volumes averaged approximately 13.4tn rupees per day in 2020. During that period, OTC spot and derivatives contracts accounted for 8tn rupees and gold futures traded 5tn rupees per day across various global exchanges. Gold-backed ETFs (gold ETFs) offer an additional source of liquidity, with the largest US-listed funds trading an average of 242tn rupees per day (Chart 11).

The scale and depth of the market mean that it can comfortably accommodate large, buy-and-hold institutional investors. In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of financial stress, making it a much less volatile asset (Chart 12). 

 

Chart 10: Gold trades more than many other major financial assets

Gold trades more than many other major financial assets

One-year average trading volumes of a number of major assets in rupees*

Gold trades more than many other major financial assets
One-year average trading volumes of various major assets in rupees *
* Based on estimated one-year average trading volumes as of 31 December 2020 ** Gold liquidity includes estimates of OTC transactions and published statistics on future exchanges, and gold-backed exchange traded products. Sources: BSE, Department of Economic Affairs , Japan Securities Dealers Association, NSE, World Gold Council For methodology please see: Gold trading volumes on Goldhub.com.

Sources: BSE, Department of Economic Affairs , Japan Securities Dealers Association, NSE, World Gold Council; Disclaimer

* Based on estimated one-year average trading volumes as of 31 December 2020
** Gold liquidity includes estimates of OTC transactions and published statistics on future exchanges, and gold-backed exchange traded products.

For methodology please see: Gold trading volumes on Goldhub.com.

 

 

Chart 11: Gold is liquid across key investment platforms

Chart 11: Gold is liquid across key investment platforms

Average daily trading volume by point of access in 2020*
Chart 11: Gold is liquid across key investment platforms
Average daily trading volume by point of access in 2020*
*Average daily trading volume from 1 January 2020 to 31 December 2020 Gold liquidity includes estimates of over-the-counter (OTC) transactions and published statistics on futures exchanges, and gold-backed exchange-traded products. For more information, see Gold trading volumes on Goldhub.com. Source: Bloomberg, Nasdaq, World Gold Council

Sources: Bloomberg, Nasdaq, World Gold Council; Disclaimer

*Average daily trading volume from 1 January 2020 to 31 December 2020 Gold liquidity includes estimates of over-the-counter (OTC) transactions and published statistics on futures exchanges, and gold-backed exchange-traded products. For more information, see Gold trading volumes on Goldhub.com.

 

Chart 12: Gold has been less volatile than many equity indices, alternatives and commodities because of its scale, liquidity and diverse sources of demand

Gold has been less volatile than many equity indices, alternatives and commodities because of its scale, liquidity and diverse sources of demand

Average daily volatility of several major assets since 2000*

Gold has been less volatile than many equity indices, alternatives and commodities because of its scale, liquidity and diverse sources of demand
Average daily volatility of several major assets since 2000*
*Annualised volatility is computed based on daily returns in rupees between 31 December 2000 and 31 December 2020. Computations of total return indices for S&P 500 Index, MSCI Daily Gross EM, MSCI Daily Gross EAFE, LBMA Gold Price PM, Bloomberg Commodity Index, LBMA Silver Price, Bloomberg WTI Crude Oil, Bloomberg Barclays Global-Aggregate Index, S&P GSCI Copper Official Close Index, S&P GSCI Platinum Index, Bloomberg Barclays Global-Aggregate Total Return Index Value Unhedged, MSCI Indian Index, S&P BSE Sensex Index. On Goldhub.com see: Gold volatility.

Sources: Bloomberg, COMEX , World Gold Council; Disclaimer

*Annualised volatility is computed based on daily returns in rupees between 31 December 2000 and 31 December 2020. Computations of total return indices for S&P 500 Index, MSCI Daily Gross EM, MSCI Daily Gross EAFE, LBMA Gold Price PM, Bloomberg Commodity Index, LBMA Silver Price, Bloomberg WTI Crude Oil, Bloomberg Barclays Global-Aggregate Index, S&P GSCI Copper Official Close Index, S&P GSCI Platinum Index, Bloomberg Barclays Global-Aggregate Total Return Index Value Unhedged, MSCI Indian Index, S&P BSE Sensex Index.

On Goldhub.com see: Gold volatility.

Enhanced portfolio performance

Long-term returns, liquidity and effective diversification all benefit overall portfolio performance. In combination, they suggest that the addition of gold can materially enhance a portfolio’s risk-adjusted returns. 

Our analysis of investment performance over the past two, five, and 10 years underlines gold’s positive impact on an institutional portfolio. It shows that the Indian pension fund average portfolio would have achieved higher risk-adjusted returns and lower drawdowns if 5%, 7.5% or 10% were allocated to gold (Chart 13 and Table 1). This positive impact has been particularly marked since the GFC.

In addition to traditional back-testing, a more robust optimisation analysis based on ‘re-sampled efficiency’20 suggests that an allocation to gold may result in a material enhancement to portfolio performance. For example, gold allocations between 5% and 10% across well-diversified rupee-based portfolios with varying levels of risk could result in higher risk-adjusted returns (Chart 14, p10).

The ‘optimal’ amount of gold varies according to individual asset allocation decisions. Broadly speaking, the analysis suggests that the higher the risk in the portfolio – whether in terms of volatility, illiquidity or concentration of assets – the larger the required allocation to gold, within the range in consideration, to offset that risk (Chart 14, p10).

Our analysis also indicates that gold’s optimal weight in these hypothetical portfolios can be statistically significant even if investors assume an annual return for gold of between 2% and 4% – well below long-term historical performance. This works equally for investors who already hold other inflation-hedging assets, such as inflation-linked bonds,21 and for investors who hold alternative assets, such as real estate, private equity and hedge funds.22

 

Chart 13: Adding gold over the past twenty years would have increased risk-adjusted returns of a hypothetical Indian pension fund portfolio

Adding gold over the past twenty years would have increased risk-adjusted returns of a hypothetical Indian pension fund portfolio

Performance of a hypothetical Indian pension fund (PF) average portfolio with and without gold*

Adding gold over the past twenty years would have increased risk-adjusted returns of a hypothetical Indian pension fund portfolio
Performance of a hypothetical Indian pension fund (PF) average portfolio with and without gold*
*Based on performance between 31 December 2010 and 31 December 2020 in rupees. The hypothetical Indian average pension fund portfolio is based on the allocation to various assets as per SBI Pension Fund for Central Government Scheme as of December 2019. Allocation is based on the investment guidelines of the Pension Fund Regulatory and Development Authority (PFRDA). It includes 11% allocation to stocks (BSE Sensex), 49% allocation to India Government Bond (S&P BSE India Government Bond Index), 37% allocation to corporate bond (CRISIL Corporate Bond Index) and 3% to cash (Bloomberg Barclays 1-3 year Indian Treasury Unhedged Index). The allocation to gold comes from proportionally reducing all assets. Risk-adjusted returns are calculated as the annualised return/annualised volatility. See important disclaimers and disclosures at the end of this report. Source: Bloomberg, CRISIL, World Gold Council

Sources: Bloomberg, CRISIL, World Gold Council; Disclaimer

*Based on performance between 31 December 2010 and 31 December 2020 in rupees. The hypothetical Indian average pension fund portfolio is based on the allocation to various assets as per SBI Pension Fund for Central Government Scheme as of December 2019. Allocation is based on the investment guidelines of the Pension Fund Regulatory and Development Authority (PFRDA). It includes 11% allocation to stocks (BSE Sensex), 49% allocation to India Government Bond (S&P BSE India Government Bond Index), 37% allocation to corporate bond (CRISIL Corporate Bond Index) and 3% to cash (Bloomberg Barclays 1-3 year Indian Treasury Unhedged Index). The allocation to gold comes from proportionally reducing all assets. Risk-adjusted returns are calculated as the annualised return/annualised volatility. See important disclaimers and disclosures at the end of this report. 

 

Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns

Comparison of an hypothetical Indian pension fund (PF) average portfolio and an equivalent portfolio with 7.5% gold over the past two, five, and 10 years based on rupee returns*

  10-year 5-year 1-year
  No gold 7.5% gold No gold 7.5% gold No gold 7.5% gold
Annualised return 9.09% 9.18% 9.22% 9.69% 10.05% 11.22%
Annualised volatility 3.52% 3.18% 3.33% 3.22% 3.28% 3.51%
Risk-adjusted returns 2.5849 2.8840 2.7707 3.0084 3.0648 3.2006
Maximum drawdown -5.64% -3.74% -1.87% -1.98% -1.87% -1.98%

*As of 31 December 2020. The hypothetical PF average portfolio and weights are based on Willis Towers Watson Global Pension Assets Study 2019 and Global Alternatives Survey 2017 and as described in Chart 13. Risk-adjusted returns are calculated as the annualised return/annualised volatility. Maximum drawdown is calculated as the largest fall in a portfolio before the total value reaches a previous peak. 

Source: Bloomberg, ICE Benchmark Administration, World Gold Council

 

Chart 14: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

(a) Long-run optimal allocations based on asset mix*

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
(a) Long-run optimal allocations based on asset mix*
*Based on monthly total returns in rupees from December 2010 to December 2020 of Bloomberg Barclays 1-3 year Indian Treasury Unhedged Index, S&P BSE India Government Bond Index, BSE Sensex, CRISIL Corporate Bond Index, Bloomberg Commodity Index (INR) and MCX India Gold Spot Index. Each hypothetical portfolio composition reflects a percentage in stock relative to cash, bonds and gold. For example: 60% Fixed Income is a portfolio with 60% in bonds and cash, 40% in stocks, alternatives and gold. Analysis based on New Frontier Advisors Resampled Efficiency. For more information see Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, Oxford University Press, January 2008. See important disclaimers and disclosures at the end of this report. Source: World Gold Council

Sources: World Gold Council; Disclaimer

*Based on monthly total returns in rupees from December 2010 to December 2020 of Bloomberg Barclays 1-3 year Indian Treasury Unhedged Index, S&P BSE India Government Bond Index, BSE Sensex, CRISIL Corporate Bond Index, Bloomberg Commodity Index (INR) and MCX India Gold Spot Index. Each hypothetical portfolio composition reflects a percentage in fixed income (bonds and cash) relative to stock, alternatives and gold. For example: 60% Fixed Income is a portfolio with 60% in bonds and cash, 40% in stocks, alternatives and gold. Analysis based on New Frontier Advisors Resampled Efficiency. For more information see Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, Oxford University Press, January 2008. See important disclaimers and disclosures at the end of this report.

 

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk

(b) Range of gold allocations and the allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix*

Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
(b) Range of gold allocations and the allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix*
*Based on monthly total returns in rupees from December 2010 to December 2020 of Bloomberg Barclays 1-3 year Indian Treasury Unhedged Index, S&P BSE India Government Bond Index, BSE Sensex, CRISIL Corporate Bond Index, Bloomberg Commodity Index (INR) and MCX India Gold Spot Index. Each hypothetical portfolio composition reflects a percentage in stock relative to cash, bonds and gold. For example: 60% Fixed Income is a portfolio with 60% in bonds and cash, 40% in stocks, alternatives and gold. Analysis based on New Frontier Advisors Resampled Efficiency. For more information see Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, Oxford University Press, January 2008. See important disclaimers and disclosures at the end of this report. Source: World Gold Council

Sources: World Gold Council; Disclaimer

*Based on monthly total returns in rupees from December 2010 to December 2020 of Bloomberg Barclays 1-3 year Indian Treasury Unhedged Index, S&P BSE India Government Bond Index, BSE Sensex, CRISIL Corporate Bond Index, Bloomberg Commodity Index (INR) and MCX India Gold Spot Index. Each hypothetical portfolio composition reflects a percentage in fixed income (bonds and cash) relative to stock, alternatives and gold. For example: 60% Fixed Income is a portfolio with 60% in bonds and cash, 40% in stocks, alternatives and gold. Analysis based on New Frontier Advisors Resampled Efficiency. For more information see Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, Oxford University Press, January 2008. See important disclaimers and disclosures at the end of this report.

Conclusion

Perceptions of gold have changed substantially over the past two decades, reflecting increased wealth in the East and a growing worldwide appreciation of gold’s role within an institutional investment portfolio. 

Gold’s unique attributes as a scarce, highly liquid, and un-correlated asset demonstrate that it can act as a diversifier over the long term. Gold’s position as an investment and jewellery has allowed it to deliver average returns of nearly 11% over the past 50 years, comparable to equities and more than bonds and commodities.26, 27 

Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. But gold’s dual appeal as an investment and a consumer good means it can generate positive returns in good times too. This dynamic is likely to continue, reflecting ongoing political and economic uncertainty, persistently low interest rates and economic concerns surrounding equity and bond markets. 

Overall, extensive analysis suggests that adding between 5% and 10% of gold to an Indian-based portfolio can make a tangible improvement to performance and boost risk-adjusted returns on a sustainable, long-term basis.29 

The strategic case for gold in India

Strong momentum into Indian gold ETF market in 2020

As the gold price started a more consistent rise in 2019 the sentiment in the Indian gold ETF market improved marginally, before momentum picked up significantly in 2020. The rising gold price, increased volatility in equity markets and economic uncertainty due to COVID-19 fuelled safe-haven demand into Indian gold ETFs in 2020. These inflows were also fuelled by strong returns on gold during the year, which at +28.1% outperformed the BSE Sensex (+17.16%) and 10-year government bond (+11.89%), supporting gold’s appeal as an asset class.30 As a result, inflows into Indian gold ETFs almost doubled in 2020 (48% of Indian gold ETF holdings), taking total gold holdings to 28.3t by the end of the year (Figure 1).

 

Figure 1: Total holdings in Indian gold ETFs expanded in 2020

Total holdings in Indian gold ETFs expanded in 2020

Holdings of gold ETFs listed on Indian exchanges

Total holdings in Indian gold ETFs expanded in 2020
Holdings of gold ETFs listed on Indian exchanges
Source: Bloomberg, ETF providers, World Gold Council

Sources: Bloomberg, ETF providers, World Gold Council; Disclaimer

 

Expansion in multi asset allocation funds

The Securities and Exchange Board of India (SEBI) issued a notification in October 2017 to categorise and rationalise mutual fund schemes in India to bring uniformity in the characteristics of similar type of schemes launched by different Mutual Funds.31  Under the rationalisation, the schemes were broadly divided into the following groups: equity schemes, debt schemes, hybrid schemes, solution oriented schemes and other schemes.

Multi asset allocation falls into a hybrid category that allows investment in at least three asset classes. As per SEBI regulations, a minimum of 10% allocation is required for each invested asset class. The inclusion of multi asset classes may increase diversification and lower overall portfolio risk. Allowed asset classes include stocks, debt, gold, commodities and REITs among others. Investment in gold can be made through physical gold, gold-backed ETFs, or other gold-related investments (e.g., derivatives or Sovereign Gold Bonds).

Multi asset allocation funds expanded further in 2020 with the launch of two new funds by Motilal Oswal and Nippon India.32 By the end of the year, ten funds were available with a total AUM of INR 146.5bn. All ten have an allocation to gold in their portfolios (Focus 2).

 

Figure 2: List of multi-asset allocation funds with investments in gold

Total AUM and % of portfolio allocated to gold

Funds  AUM (INR bn) Allocation to gold (%)
SBI Multi Asset Allocation Fund 2.2 17.1%
HDFC Multi Asset Fund 4.7 14.8%
ICICI Prudential Multi Asset Fund 110.6 12.6%
Axis Triple Advantage Fund 6.9 10.0%
Quant Multi Asset Fund 0.1 32.1%
UTI Multi Asset Fund 6.9 10.2%
Essel 3 in 1 Fund 0.2 12.8%
Tata Multi Asset Opportunities Fund 5 2.1%
Motilal Oswal Multi Asset Fund 2 10.8%
Nippon India Multi Asset Fund  8.4 13.7%

* As of 31 December 2020. Allocation to gold refers to gold ETFs, gold futures and Sovereign Gold Bond. 

Source: Factsheet of Individual Mutual Funds
 

Indian gold ETF holdings nearly doubled in 2020

 

Investment products available for Indian investors

 

Figure 3: Indian investors can choose from different types of gold investment products, including: physical gold (bar and coin), gold ETFs, Sovereign Gold Bond (SGB) and Digital Gold.

Certain relevant features of physical gold, gold-backed ETFs, Sovereign Gold Bond and Digital Gold

 Parameters Physical gold Gold-backed ETFs Sovereign Gold Bond Digital Gold*
Denomination Various, including: 22k (916), 24k (995;999;9999) Backed by 24k (995) gold bullion but most hold small quantities in cash or equivalent (usually less than 1%) Denominated in grams of gold equivalent to 24k (999) 24k (995;999;9999)
Investment limit Minimum may depend on availability or provider guidelines Minimum equivalent to ½ gram Minimum 1 gram and maximum 4kg for an individual Minimum as low as 1 Rs, depending on the provider
Interest No interest No interest 2.5% per year, payable every six months No interest
Duration N/A N/A 8-year tenure of the bond with an exit option available from the 5th year onwards; investors may also be able to buy/sell on the secondary market N/A
Custody and insurance Professional vaulting and insurance at additional cost As per SEBI regulations N/A Professional vaulting and insurance included in price of gold (subject to terms of respective provider)
Taxation Normal rules of capital gains apply Normal rules of capital gains apply Exempt from long term capital gains if held to maturity Normal rules of capital gains apply
Other N/A Regulated by SEBI Issued by RBI N/A

*Digital Gold allows investors to buy physical gold online, have it stored in professional vaults and take possession of it should the need arise.

See Internet Investment Gold on Goldhub.com

Source: Reserve Bank of India, respective physical gold, respective gold ETF and digital gold providers

Important: The information above has been sourced from publicly available sources as indicated. The above is not a recommendation to invest/disinvest in any product listed above and should not be considered as investment or tax advice. If as a recipient of this document you are in any doubt about products highlighted above, please consult a person authorised under law who specialises in advising on investing in securities. Summaries of laws and regulation set out above are solely to provide the readers with general information and understanding of relevant Indian law. These do not constitute specific legal advice. Please refer to the important disclaimers and disclosures at the end of this report for further information.
 

1Oxford Economics is a leader in global forecasting and quantitative analysis and a specialist in modelling. Visit QaurumSM for important disclosures about Oxford Economics’ data, as well as a detailed description of the available scenarios; the assumptions underlying and data used for each scenario; and its respective hypothetical impact on gold demand, supply and performance.

2Mercer European Asset Allocation Insights 2020, August 2020

3Refinitiv, How do ESG scores relate to financial returns, August 2020.

4Gold and climate change: Current and future impacts, October 2019

5An institutional investor holds and/or manages assets for clients in larger, pooled portfolios often represented as mutual funds, banks, brokerages, hedge funds, etc.

6Willis Towers Watson, Global Pension Assets Study 2021, and Global Alternatives Survey 2017, July 2017.

7Returns in rupees from 31 December 2000 to 31 December 2020.

8See Chart 13 on p9 for more details behind the composition of the hypothetical average Indian pension fund portfolio. Based on 2000 – 2020. In addition, refer to important disclaimers and disclosures at the end of this report.

9January 1971 – December 2020.

10During the gold standard, the US dollar was backed by gold, and the foreign currency exchange rates were dictated by the Bretton Woods System. In August 1971, the Nixon Administration announced the halt of the free conversion between the US dollar and gold catalysing the collapse of the gold standard and, subsequently, the Bretton Woods system.

11For other return metrics and performance see Appendix II on page 17.

12See Chart 18a, on page 15.

13Based on average annual CPI changes for India and world as measured by the IMF from December 1980 – December 2020. 

14Oxford Economics, The impact of inflation and deflation on the case for gold, July 2011.

15Ibid footnote 10.

16From December 2001 – December 2020. See the Demand and Supply section at Goldhub.com.

17For more information please see The impact of monetary policy on gold and It may be time to replace bonds with gold.

18Based on the LBMA Gold Price PM from 1 December 2007 to 27 February 2009.

19Based on the LBMA Gold Price PM from 1 October 2018 to 27 December 2018 and from 31 January 2020 to 31 March 2020.

20Re-sampled efficiency is a methodology developed by Richard and Robert Michaud and praised as a robust alternative to traditional mean-variance optimisation. See Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, Oxford University Press, January 2008.

21Gold as a tactical inflation hedge and long-term strategic asset, July 2009, July 2009.

22Enhancing the performance of alternatives with gold, February 2018.

23See: Gold: the most effective commodity investment, and Gold: metal by design, currency by nature, Gold Investor, Volume 6, June 2014.

24For more information on the gold weight increases see: Major commodity indices will increase gold weightings for a second year in a row.

25Gold: the most effective commodity investment, September 2019.

26Average annualised returns in US dollars from January 1971 to December 2020.

27See Chart 22 p17.

28The Greenhouse Gas Protocol, Ecoinvent database. Please see Gold and climate change: Current and future impacts and Gold and climate change: An introduction.

29See Chart 13, p9

30As of 31 December 2020. Computations in Indian Rupees of total return indices for BSE Sensex and S&P BSE India Government Bond index. For domestic gold price MCX India Gold Spot Index is considered.

31www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html

32Motilal Oswal Multi Asset Fund and Nippon India Multi Asset Fund were launched in July and August 2020

Important disclaimers and disclosures

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Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below.

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Neither the World Gold Council nor any of its affiliates (collectively, “WGC”) guarantees the accuracy or completeness of any information. WGC does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information.

This information is for educational purposes only. Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person.    

By receiving this information, you agree with the intended purpose of this information as being for educational purposes only.  Diversification does not guarantee any investment returns and does not eliminate the risk of loss.    

Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.

This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. WGC assumes no responsibility for updating any forward-looking statements.

Information regarding QaurumSM and the Gold Valuation Framework 

Note that the resulting performance of various investment outcomes that can generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.  World Gold Council and its affiliates and subsidiaries (collectively, “WGC”) provide no warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.

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