When evaluating Gold an asset, we consider its ability to preserve wealth over time. Essentially, we ask whether it will hold its value over the next 5, 10, 15, or even 50 years, or if it will depreciate. The basic idea is straightforward: if an asset can be produced without limits, its value is likely to erode over time. In contrast, an asset that is scarce and inherently useful is more apt to maintain its worth.
Gold has consistently preserved its value throughout history because it is a limited resource with inherent qualities that confer worth. Unlike paper money or equities, gold’s value is not dependent on the economic health of a single nation or corporation. Its enduring reputation as a store of wealth and a safeguard against inflation has made it a favored asset during times of economic or geopolitical uncertainty.
Gold vs Indian Equities
Historically, there has been either a low or inverse correlation between equities and gold. Consider the data below to compare the returns of the Nifty 50 index with a portfolio that divides its holdings equally between the Nifty 50 and gold.
Between April 2007 and February 2025, the Nifty 50 index delivered a 10.51 percent return with a -59 percent drawdown, whereas a combined portfolio of Nifty 50 and gold achieved a 12.30 percent return with a notably smaller drawdown of -34 percent.
This indicates that while investors in the Nifty 50 alone earned returns comparable to those who held an evenly split portfolio of Nifty 50 and gold, the latter experienced almost half the risk.
This straightforward analysis underscores gold’s role in enhancing diversification and mitigating overall portfolio risk. It also reflects the inverse relationship between gold and equities, which is supported by logical market factors.
- Risk-off sentiment: In times of economic downturn or financial crisis, when confidence in government-backed assets wanes, investors shift their capital toward hard assets like gold.
- Currency weakening: A struggling economy often sees its national currency lose value. As a result, gold prices tend to rise because investors look for a store of value that isn’t affected by local currency fluctuations.
Gold as a hard asset and its key role in the monetary system
Gold stands out from other investments primarily because it is classified as a hard asset—a tangible resource with intrinsic value that is independent of any financial system or credit risk.
A pivotal moment in gold’s history occurred in 1971 when US President Richard Nixon decisively abandoned the gold standard. Before this change, the US dollar was directly tied to a fixed quantity of gold, which meant that the government needed to maintain gold reserves equivalent to the currency in circulation. This system helped stabilize the dollar’s value and bolstered confidence in the US economy.
In August 1971, Nixon declared the suspension of the dollar’s convertibility into gold, effectively dismantling the Bretton Woods system and ushering in the era of fiat currencies. This shift dramatically reshaped the dynamic between gold and the global economy.
After the collapse of the gold standard, the metal’s price experienced a dramatic surge. Uncertainty over the future value of fiat money, coupled with rising inflation fears, drove investors toward gold as a safe haven. Between the 1970s and 1980, gold prices soared from roughly $35 per ounce to over $800 per ounce, driven by economic instability, inflation concerns, and a declining US dollar.
Conclusion
With mounting US debt and growing global uncertainties, gold is poised to remain a critical component in future investment portfolios. While it may not generate wealth in the traditional sense, gold is indispensable for portfolio diversification and capital preservation. Successful long-term investing often hinges on striking the right balance between assets geared for wealth creation and those that safeguard capital.