If you’re thinking about investing in gold, there are certain points you should know. Gold is unquestionably a hedge—not only against inflation, but against the volatility of other asset classes such as equity and, at times, bonds. Historically, gold has been chosen during financial meltdowns when stocks fall and government and corporate bonds lose value. So, gold is anticipated to do well while others are down, offering some downside safety to your investment portfolio.
When comparing gold’s rolling 1-year, 3-year, and 5-year returns versus those of bonds from 2014 to 2024, bond indices have outperformed gold on rolling 1-year and 3-year returns while matching gold returns over 5-year period. Furthermore, gold has a substantially greater mean deviation (the difference between gold prices and their median price for a particular period) than bonds.
Ultimately, in this comparison, we can see that gold has a larger likelihood of negative returns over one and three year periods than bonds. Also, the magnitude of the gold price drop is significantly greater when compared to bond prices. For example, the worst returns for gold during rolling 3-year periods from 2014 to 2024 are -8%, compared to 4.4% for the Composite Bond index and 5% for Gilt.
Over shorter durations, gold is a volatile asset class, and it is preferable to employ short-duration bonds/debt funds if your investment period is short-term. However, investing some percentage to gold helps safeguard portfolios during downturns. As a result, it is not the debate of gold vs bonds, but both should be present in portfolios lasting more than five years. Bonds are less volatile than gold over the course of fewer than five years investing period.
Financial experts often advocate investing 10-15% of one’s portfolio in gold, assuming one does not already own a large amount of physical gold. Also, one might think that gold may be utilized for low-cost borrowing. Even while gold loans are less expensive than personal loans, you may now borrow against mutual fund units at competitive interest rates. As a result, the necessity to rely only on gold in an emergency has changed during the last few decades. So, while gold is an effective hedge against inflation and market uncertainty, it is not a viable replacement altogether to other asset classes such as stocks and bonds.
