11% CAGR in 20 yrs: How does gold compare against Nifty 50 during crisis?

Gold over the last two decades has on average returned an 11%  compounded annual growth rate, and demand for the yellow metal is expected to rise despite geopolitical uncertainties this festive season, said a study by Windmill Capital, a wholly owned subsidiary of smallcase Technologies Pvt. Ltd.

The study highlights that in times of geopolitical uncertainty, gold is expected to trend higher in the immediate term.

“It would be ideal to advise investors to invest in portfolios including both gold and equity. The performance of gold will offset the poor performance of equities during unfavorable macro events or persistently high inflation”," said Naveen KR, smallcase manager and senior Director - Investment Products, Windmill Capital.

As per the study, gold is an efficient asset class that provides safety. Historically, whenever there is turmoil in the market, investors’ natural tendency is to flee to safety. Gold as an asset class tends to do well during crises. For example, while Nifty returns have been negative during Covid crisis or Russia-Ukraine war, Gold returns have been positive with <20% returns. "Hence gold is an effective hedge against equities," noted the study.

 The table below compares the performance of gold against the Nifty 50 performance during times of crises.

Note: From the start date to the end date, the Nifty value and MCX Gold Commodity Future Continuation 1 value is used for return calculations.

"Gold also acts as an efficient hedge against inflation outperforming Nifty 50 during high inflation periods. High inflation has generally correlated with lower equity returns. On the other hand, over the long term, gold acts as an efficient hedge against inflation. The table illustrates the performance of Nifty 50 and gold during periods of high inflation periods.

Geopolitical impact on Gold
 

While gold has always been in demand, a fresh exuberance was seen in 2022 post-Russia’s invasion in Ukraine. When Russia invaded Ukraine, the US in an attempt to punish Russia, froze Russia’s forex reserves worth $300 billion. In addition, it also introduced sanctions against Russia. These measures prompted other countries, especially emerging economies, to wonder if the US can levy a sanction on Russia’s forex reserves (which have to be mandatorily located in the United States).

 In 2022, central banks bought a record 1,136 tonnes of gold, worth around $70 billion.

 "Another interesting trend that is emerging is West is relying on its wealth while the East is purchasing Gold. The geopolitical trends and the way the market performs during the current quarter makes Gold a favourite asset class. The traditional urge to invest in gold, especially during the festive season in India will linger for ages," said the study. 


Gold can touch 63,000 in the medium term

Another study by Motilal Oswal  suggests that the yellow metal is likely to hit around Rs 63,000 in the medium term. Gold has yielded strong returns in the past, more than doubling in the last 10 years and advancing over 60 percent just in the last 4 years. According to the brokerage, if you invested in gold during Diwali 2019, by this Diwali you would have been sitting on 60 percent returns on your domestic gold investments.You can read more on this here