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Key Highlights

Among all the available asset classes, gold is often considered as a hedge against inflation

Inflation has been rising globally, becoming the biggest threat for investors

Will your investment be able to generate inflation-beating returns?

New Delhi: At present, the biggest risk that investors are talking about is inflation as prices are picking up faster than usual globally due to the easy monetary policy adopted by most of the global central banks over the last two years to help their economies recover faster from the impact of COVID pandemic. Rising commodity prices are another reason behind the rising inflation globally.

If you have invested in an asset class that will not be able to generate inflation-beating returns then probable you will end up in eroding your capital. In India also, retail inflation has picked up recently. So investors should know if they are holding the right asset class so that they can beat the expected inflation. 

Among all the available asset classes, gold is often considered as a hedge against inflation, which means the yellow metal will be able to beat inflation over the long term. Given the situation should you continue investing in gold or increase allocation to the yellow metal to generate inflation-beating returns? 

Over the past 30 years (from 1991 to 2021) gold prices have risen from Rs 3,200 per 10-gram levels to Rs 48,000 levels now, generating an average annualised return of little over 9%. In the last 10 years, the yellow metal has generated an annualized return of 11% as compared to the average inflation rate of 6.3% during the same time frame. So it can be said that over the long term gold can act as a hedge against inflation. 

Gold is also known as a safe-haven asset, as it performs well when other asset classes such as equities generate negative returns. For example, in the calendar year 2001, the Nifty50 index corrected by 18%, but gold prices rose from Rs 4,400 level to Rs 4,800 level, delivering a return of nearly 9%. Similarly, during the global financial crisis in 2008, the NSE benchmark fell by 52%, while gold prices rose from Rs 11,400 level to Rs 14,500, a return of 27%.

Even if we see the recent data from the beginning of 2018 to the end of 2020 (three years), Nifty50 witnessed extremely high volatility and generated a CAGR of 10%, while gold generated a CAGR of 19% in the same period.

However, like equity, gold is also a volatile asset so the investment horizon in gold should be long term. So gold should form a part of your portfolio as a strategic allocation. 

How much gold should you hold?

As gold is considered as a hedge against inflation, whenever inflation rises demand for gold goes up. According to a study by World Gold Council, for every 1% rise in inflation, demand for gold rises by 2.5% and hence the price. Experts say gold should not be bought only when you expect inflation to rise, as no one would be able to time his gold investment with 100% accuracy. So it should be a part of your long term portfolio and constitute between 10-20% of your overall investment portfolio depending on the individual investor’s risk profile.  

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