Investment in gold can be more than a hedge against inflation

One of the biggest risks of investing is not being able to beat inflation. So, if you are invested in an asset class that is not able to deliver inflation-beating returns, it is possible that you may not be able to save enough to provide for your retirement years.

As the fear of rising inflation is mounting across major economies we have seen an uptake in the retail inflation in India as well, you as an investor must be wondering if you are holding the right asset class to be able to beat inflation.

Among the various asset classes, gold is often considered as a hedge against inflation. It basically means that over the long term, gold has been able to deliver higher-than-inflation returns. So, as we are likely to see inflation going up—even the Reserve Bank of India (RBI) has projected that retail inflation represented by consumer price index (CPI) is likely to remain above 5% for FY22—should you increase your allocation to gold? Let’s understhow gold has performed against inflation whether you should increase your allocation towards this asset class.

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Data suggest that gold has been able to deliver inflation- beating returns. “Over the last 30 years, in rupee terms, gold has generated an annualized return of 10%. Over the last decade, the annualized return from gold has been 11%. During the same period, the CPI index has compounded at 6.3%. Hence, it can be stated that over longer periods, gold does act as a hedge against inflation,” said Nitin Shanbhag, head, investment products, Motilal Oswal Private Wealth Management.

Gold is also considered a safe haven asset, has been delivering returns when other asset classes such as equities have failed to perform.

For example, in calendar year 2001 (CY01), domestic equity (Nifty50 index) corrected by 18%, while gold gave positive returns of 6%. In CY08, during the global financial crisis, Nifty50 fell 52%, while gold was positive 26%, as per data provided by Motilal Oswal Research.

In the recent past, from the beginning of CY18 to the end of CY20 (three years), Nifty50 witnessed extremely high volatility generated a CAGR of 10%, while gold generated a CAGR of 19% in the same period.

However, gold is a volatile asset. “It is important to note that the volatility from gold is much higher than traditional fixed income instruments. Hence, the investment horizon for gold should be at least three years, ideally it should be treated as a strategic allocation,” said Shanbhag.

Should you hike your allocation?

Experts say gold should be part of an investor’s portfolio, whether it has been able to provide a hedge against inflation or not.

“Inflation can become a destructive force in an economy because it erodes the value of money, declining the purchasing power of the dollar that is why gold is usually looked up as a hedge against inflation. But gold is not purely bought because you think inflation is coming, it is looked at as a long-term investment product. Inflation or no inflation, one should include gold in one’s portfolio because there are other idiosyncratic risks, such as geopolitical tensions or a catastrophe like the covid-19 pandemic. And it has lived up to its safe haven appeal, especially in these times,” said Rahul Gupta, head of research, currency, Emkay Global Financial Services.

“Investors could look at holding around 10-20% of the portfolio in gold depending on the individual risk-profile,” said Shanbhag.

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