Investor Corner/The asset classes/Real Assets: REITs, InvITs and Gold
2.5.4 Gold as an Asset Class
Gold acts as a hedge against inflation, currency weakness and extreme market stress. It produces no income of its own; returns come purely from price appreciation. Most long-term portfolios keep a modest allocation of around 5 to 10 percent.
What gold is actually good for
Gold has historically tended to hold or increase in value during periods of high inflation, currency instability, or acute financial market stress, precisely the conditions under which both equity and, at times, debt can struggle simultaneously. This makes it a useful diversifier specifically for the kinds of extreme scenarios that other asset classes handle poorly.
Gold is not a productive asset. It does not pay dividends, generate earnings, or produce cash flows. Its value comes from scarcity, durability and the enduring global consensus that it serves as a store of value. Over very long periods (measured in decades or centuries), gold has roughly preserved purchasing power. One tola of gold bought roughly the same quality of clothing in India across several centuries, which is a remarkable fact but says nothing about its ability to grow wealth. Preserving purchasing power and growing purchasing power are fundamentally different things.
Gold's primary portfolio role is as a diversifier and crisis hedge. It tends to hold value or appreciate during periods when equity markets fall sharply, currencies weaken, or geopolitical tensions escalate. In the 2008 global financial crisis, gold rose while equities collapsed. During the rupee's periodic sharp depreciations, gold priced in rupees has tended to appreciate. This counter-cyclical behaviour is what makes a small gold allocation useful: it provides a buffer during the scenarios when the rest of the portfolio is under stress.
What gold is not particularly good for
Unlike equity, gold pays no dividend, and unlike debt, it pays no interest. Its long-run real return, after accounting for inflation, has historically been considerably lower than equity's over most extended periods. Gold is better understood as a portfolio stabiliser and diversifier than as a primary long-term growth engine.
Gold is not a reliable inflation hedge over intermediate periods of 5-10 years, despite the common belief. There have been extended periods (notably 2012-2019) when gold delivered flat or negative real returns even as inflation ran at normal levels. The inflation-hedging property only holds over very long horizons where gold's role as a store of value asserts itself. For shorter-term inflation protection, instruments like inflation-indexed bonds or equity (which tends to pass through inflation via pricing power) may be more reliable.
Gold also does not produce income. In a portfolio context, this means the opportunity cost of holding gold is the return that the capital could have earned in dividend-paying stocks or interest-bearing debt. Over the long term, equity has outperformed gold by a significant margin. Gold's role is not to maximise returns but to reduce portfolio volatility and provide a safety net during severe market stress. It is insurance, and like all insurance, it has a cost in forgone returns during good times.
How much is generally sensible
A common guideline suggests keeping gold to somewhere between 5 and 10 percent of an overall portfolio, enough to provide a genuine diversification benefit during periods of stress without letting it meaningfully drag down the portfolio's overall long-run growth during normal market conditions.
How PriLytics helps. PriLytics tracks your gold holdings, including sovereign gold bonds, alongside every other asset class in one consolidated allocation view. See your true asset allocation.
A commonly suggested allocation to gold is 5-10% of the total portfolio. Below 5%, the diversification benefit is too small to matter. Above 10-15%, the portfolio begins to drag from gold's lower long-term return relative to equity, and the opportunity cost becomes significant. Within this range, gold provides meaningful reduction in portfolio volatility and drawdown severity during crises, without materially compromising long-term returns. The allocation should be rebalanced periodically: if gold rallies sharply (as in a crisis), trim back to target; if it lags, let the other assets do the heavy lifting.