Will gold rush outclass other asset classes this year?

Gold has made investors sit up and take notice after breaking through the $2,600 per ounce barrier. Gold has consistently outperformed expectations since the start of 2024.

This price surge reaffirms gold's status as a sought-after asset and the gold versus equities debate is raging among investors in India. 

Gold and equities each have distinct characteristics, and the decision between the two is not about choosing one over the other but rather about strategically allocating to both to mitigate risk. Historically, both asset classes have delivered returns, but their performance cycles often vary, underscoring the importance of diversification for a balanced risk-return profile.

Data show that while the Nifty has outperformed MCX gold over the last 20 years (12.7 percent vs 12.0 percent CAGR) and the past decade (12.8 percent vs 8.9 percent), gold has outpaced Nifty in the last five years, offering a 16.2 percent return compared to Nifty’s 14.0 percent. Gold's strong performance during market crises, such as the 2008 financial meltdown, highlights its value as a defensive asset during turbulent times.

Gold versus equities

Given the current market scenario, the key question arises: will gold outperform Nifty in 2024, and how should investors adjust their portfolios? Should one reduce equity exposure in favour of gold?

Here's what the experts suggest:

Ajit Mishra of Religare Broking points out that equities and gold have shown strong momentum in 2023, a trend likely to continue through 2024. The US Federal Reserve's rate cut cycle could benefit both asset classes, providing a favourable environment for equities and gold alike. While equities may continue to see robust domestic inflows, gold could gain from a weakening US dollar, falling bond yields, and ongoing geopolitical tensions.

Mr Mishra suggested that investors maintain a balanced portfolio, incorporating a mix of equities, debt, and gold, aligned with their risk tolerance. He highlighted that gold can act as a hedge in uncertain times, making it an essential part of any well-diversified portfolio.

Geopolitical tensions

Sujit Modi of Share. Market noted that while the Nifty 50 gained around 17 percent, gold has risen by approximately 16 percent on a rolling futures basis. The improved performance of gold this year, in contrast to previous years, can be largely attributed to global tensions, increased gold purchases by major central banks such as China, and ongoing economic uncertainty in the US and Europe.

For long-term investors, he emphasised that the outperformance of one asset class over another should be less of a focus. Instead, decisions should be based on maintaining appropriate asset allocation. If an investor's equity exposure exceeds their risk tolerance, it may be advisable to reduce equity holdings and consider reallocating to gold. Experts often recommend an ideal allocation of 5 percent to 10 percent to gold within a portfolio, so investors should adjust accordingly when deciding to buy or sell.

Trivesh D of Tradejini pointed out that gold tends to perform well during periods of uncertainty, acting as a safe-haven asset. However, if global tensions stabilise and no major crises emerge, gold's performance may be limited in the near term. On the other hand, equities benefit from economic growth and corporate performance, which could lead Nifty to outperform.

For most investors, making a drastic shift from equities to gold is unnecessary unless they anticipate significant instability ahead. Gold should serve as a hedge, but equities generally offer higher growth potential. Mr Trivesh advised maintaining a diversified approach with a balanced allocation to both asset classes.

Fed's rate policy

Aamir Makda of Choice Equity Broking highlighted that the Federal Reserve's monetary policy will play a critical role in shaping gold prices in 2024. An interest rate cut by the Fed could increase gold's appeal. He advised investors to monitor interest rate decisions closely and adjust their portfolios accordingly.

Mr Makda noted that both Nifty and gold have performed well post-pandemic. The Nifty-50 surged by over 50 percent since 2020, while gold delivered a consistent 15 percent annual price growth. He recommended that investors maintain a diversified portfolio with a suitable mix of gold and equities, particularly amid economic instability or geopolitical tensions.

Shiwani Kumari of Monarch Networth Capital pointed out that gold typically outperforms equities during periods of high inflation, geopolitical tension, and economic uncertainty. Current concerns about a global economic slowdown and geopolitical risks could continue to support gold’s momentum in the near term. However, as the global economy recovers and corporate earnings improve, equities, particularly the Nifty, may see stronger returns.

5 to 15 percent portfolio allocation

Mr Kumari suggested maintaining a 10 percent to 15 percent allocation to gold as it can provide protection in uncertain times. However, she emphasised that the core portfolio for long-term investors should be centered on equities, especially high-quality stocks. With India's economic outlook remaining robust and driven by growth and policy reforms, the Nifty is poised to deliver strong performance in the coming years.

The debate over whether gold will outperform Nifty in 2024 comes down to several factors, including economic growth, central bank policies, and geopolitical stability. While gold offers a hedge against uncertainty, equities remain a key driver of long-term growth. Experts recommend maintaining a well-diversified portfolio that balances both asset classes, with an allocation to gold that ranges between 5 percent to 15 percent, depending on individual risk tolerance and market conditions. By doing so, investors can ensure they are well-positioned to navigate both volatility and opportunity in the year ahead.

(By arrangement with livemint.com)