Gold Returns – How gold has delivered over the years and how returns compare against the Nifty 50

There is no denying the fixation us Indians have with gold.  But the good news is that this is probably one fixation that doesn’t need fixing! Gold returns can instead be used to benefit our investment portfolio, as it provides balance to an equity-and-debt portfolio. However, before adding gold to a portfolio, it is important to understand how gold returns have been in the past and the characteristics of gold returns. Not just that, given that there are many ways to invest in gold, using the right mode is essential to get the most out of gold returns.


What are the factors that influence prices and gold returns?

Gold prices move in response to changes in demand and supply. Retail gold jewelry buyers, investors in bars and coins, ETFs demand, central bank buying, those who hold gold and miners mining fresh gold are some of the key players in the gold demand and supply ecosystem. All of these players behave in different and even opposing ways, thereby impacting the demand-supply balance.

On the demand side, the following factors are key influencers: 

  • customers looking to buy ornaments would put off purchases in a high gold price environment but line up to do so when gold prices drop 
  • investors in coins, bars and ETFs may step up purchases when gold starts moving up or when gold returns begin improving. As a consequence of higher investor demand, gold ETFs too tend to step up purchases 
  • Central Banks around the world hold gold as reserves. According to the World Gold Council, Central Banks accumulated 463 tonnes of gold in 2021, 82% higher than the 2020 total, lifting global reserves to a near 30-year high. 
  • gold also has several uses in industrial and medical devices, but is a smaller demand factor and thus does not affect gold returns much.

On the supply side, the factors below are major influencers:

  • Owners holding gold and looking to sell (recycle old gold) who may want to make the most of a high gold price environment
  • Gold miners too will look to tune supply based on gold returns, prices, and demand. It is worth noting that new gold will likely get progressively harder, more expensive and hazardous to mine, possibly placing restrictions on supply over the very long term.

But quite apart from demand and supply, the primary driver of gold prices and thus returns are the state of global equity markets. Geopolitical and other macro concerns can nudge investors into a risk-off mode, which pushes them into the safety of gold. Throwback to 2020, when the pandemic first raised its head and sent stock markets all over the world into a tizzy - at this time, gold returns moved in the opposite direction hitting a high in August 2020.

Gold vs Nifty 50

Gold returns and equity returns are inversely correlated, which makes gold a good hedge in equity-heavy portfolios. Since gold does not have an innate earning potential, unlike stocks, gold returns are dependent on global equity and debt markets, as well as the US dollar movement. Domestic gold prices are a factor of global gold prices, the exchange rate, and local customs duties. Therefore, a depreciating rupee can add to gold returns over and above the global gold return. 

Comparing gold vs Nifty 50 will give you an idea about how to use gold in your portfolio.

How does gold provide returns?

The interesting thing about gold is that it does not generate any cash flows in the form of interest, dividends or profits unlike other financial asset classes such as bonds and equity. It is therefore not an asset that can be used to create wealth. Gold returns only through price movements. 

This highlights the inverse relationship gold returns share with that of other asset classes such as equity. When equity markets are under stress, gold prices will be up as more investors seek the security that investing in gold provides, earning it the reputation of being an ‘insurance’ for an equity portfolio.

How do gold returns behave?

It is important to know how gold vs Nifty behaves, in order to get allocations right. Being influenced by current high returns may result in you investing heavily in gold. This article will throw more light on how gold prices work. As explained in that article, gold has averaged 9.2 to 9.3% CAGR for Indian investors who held it for 3 and 5 year periods and 10% CAGR for 10 year periods on a rolling returns basis. 

Looking at gold returns in isolation won’t tell you much. So here is what you should note, especially in gold vs Nifty 50:  

  • gold can lie low for long periods of time and then compensate through spectacular results
  • gold is also prone to extremes (up and down). Volatility in gold vs Nifty is notable.
  • gold can and has in the past delivered losses comparable to equity and even over medium time periods. However, over longer time periods, the high returns will even out the sub-par ones. 
  • It has a higher probability of negative returns than equity in the short to medium term. 
  • timing your entry and exit could help maximise your returns in this asset class.
  • gold tends to perform best when other asset classes such as equity are under stress.

Our article, ‘What can you expect from gold returns’, crunches the numbers to derive insights into how gold returns behave.

Gold vs Nifty 50 – gold’s role in your portfolio

Due to the nature of returns from gold and the way in which gold vs Nifty 50 behaves, it serves the purpose of protecting one’s portfolio during falls in the equity markets. This is especially if the portfolio is equity heavy. Further, gold’s ability to hold its purchasing power in an inflationary scenario also acts as a hedge against inflation. 

Due to this, it is recommended that one allocates up to 10% of one’s portfolio to gold. This 10% can be accumulated over time, on dips. However, in terms of wealth creation and gold vs Nifty, gold is not a wealth creator. It cannot play the role that equity does in your portfolio and so cannot replace equity.

To know how to allocate to gold vs Nifty or other assets, our article on how gold returns behave will be of use.

The many ways to invest in gold

Gone are the days when one had to make a trip to their trusted family jeweler and select an ornament or at best a coin in order to get the financial security that gold brings. Today physical gold is just one of the many ways to own gold and has gone beyond buying only jewelry. 

Apart from having standardized gold coins / bars to choose from, investors who want none of the hassle of holding physical gold, but only the benefits that it brings to a portfolio, have several avenues to choose from. 

  • Sovereign Gold Bonds (SGB) are Government securities that come with a fixed tenure and a lock-in up to the 5th year. The prices of SGBs are linked to the prevailing gold prices and also come with a fixed income component that makes them attractive.
  • Gold ETFs are passive investment vehicles that are issued by mutual fund houses. The ETF buys and holds the bullion and one unit of the gold ETF represents a gram of gold. Gold ETFs closely track gold prices and are tradeable on the stock exchange.
  • Gold Mutual Funds are funds that invest in gold ETFs in an attempt to closely track the prevailing gold prices. Investing in these is as easy as investing in any other mutual fund and unlike ETFs, one does not need a demat account to invest in gold mutual funds. Here is an in depth answer to the question, ‘What are gold mutual funds?’.
  • Digital Gold is a fairly new route to take to invest in gold. Whenever a customer makes a purchase of digital gold usually online and via e-wallets such as G-Pay and Amazon Pay, at the back end, one of the licensed digital gold players in India – MMTC-PAMP, Augmont, Digital Gold India (SAFEGOLD) – will buy and safeguard the physical gold. However, while it comes with very low minimum investments, being a relatively new avenue, it also brings with regulatory ambiguity. 

For a detailed look at all the different ways one can invest in gold, and the pros and cons of each route, take a look at our article on ‘How to invest in gold’.

How to invest in gold?

We think ETFs, SGBs, and gold mutual funds are the best ways to hold gold in your portfolio. ETFs allow you to make tactical investments. SGBs are better for planned investments and offer additional interest payment. If you do not have a demat account to access ETFs, then the gold mutual fund route is the way to go. If you want to get to the bottom of the ‘ETF vs. SGB’ debate, our article, ‘Sovereign gold bonds or ETFs, which is the better gold investment’ will give you all the insights you need. 

Our subscriber-only ‘Theme Park’ section will give you options that you can use to play the gold theme. Prime ETFs will tell you which gold ETF options we recommend and Prime Ratings will show you how we have rated the different gold mutual funds.

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