For centuries Indians have loved gold and despite all the financialization of savings, Indians still love gold over paper financial assets. There is an inherent wisdom that has prevailed over the masses over a long time being passed on from generation to generation rightly or wrongly, preferring safety over higher returns.
Before 1971 when President Nixon abandoned the Gold backed USD, every currency was pegged to the dollar and dollar was in effect tied to Gold as was decided in the 1944 Bretton Woods agreement. So, to that extent all currencies were indirectly pegged to the Gold backing till 1971 when this entire system came apart. Since 1971 there has been rampant and incessant increase in Fiat money supply at the will of the central bankers, leading to ballooning Debt to GDP levels and even prolonged periods of zero or negative real interest rates.
In effect, the global monetary system has been broken for a while now and the after effects of that in terms of ballooning and a difficult to control inflation are there for us and future generations to deal with. Sample this, US printed an insane $3T dollars in a few months in 2020, an amount it printed over decades previously. Thus, with this kind of a change of global money base, the global economic balance had to come apart.
Enter Gold
Gold has played an important role for all currencies and nationalities not pegged to the US Dollar. While the exorbitant privilege of the USD allows the western world to buy goods and services cheap from the rest of the world, the artificial USD strength forces other currencies to be relatively weak. From a local investors perspective to maintain an inflation protection from rising prices and to protect oneself from ones own local currency depreciation and local politics (examples Venezuela, Turkey, Sri Lanka recently) one must invest in global asset classes to diversify away some of the local risks. You never know how a dramatic change in local politics can create a debacle in the economy and even global market headwinds may prove to be detrimental locally. Hence a hedge of the form of a non-rupee denominated asset is needed for Indian investors.
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Gold can fill that hedge requirement very nicely. The beauty of Gold is that it is a globally priced asset easily available in local currency. It protects you against uncertain periods of local economy as well as inflationary global trends. In the last 50 years, Gold in INR has delivered a return of more than 11.5% CAGR with a remarkable smooth trend. This has withstood all local and global upheavals and in fact has provided a great counterbalance to your other INR investments.
Examples of the positive impact of Gold as a hedge are very visible when we combine Gold with equity. We encourage users to have asset allocation to Gold along with high momentum stocks to generate superior alpha to the market. Gold has a natural tendency to offer a complimentary position to equity in the India context. In times of market stress like 2008, 1015, 2020 etc, Gold INR has performed brilliantly to make sure the over all portfolio is well protected.
(By Alok Jain, Founder, Weekendinvesting Analytics P Ltd, SEBI Research Analyst)