Gold Outshines Stocks: Should It Dominate Your Portfolio?

Gold has delivered a remarkable 17% compound annual growth rate (CAGR) over the past two decades in India, slightly outperforming both the Sensex and Nifty 50, which saw 13% CAGR. Silver also posted an impressive 18% CAGR during the same period. This performance challenges conventional wisdom, which typically advises limiting gold exposure to 20% of an investment portfolio.

Traditionally, gold is seen as a hedge against inflation, currency volatility, and geopolitical risks, providing a cushion during uncertain economic times. However, a higher CAGR does not necessarily equate to better long-term wealth creation compared to equities. Factors like market volatility and the sustainability of current bullish trends for gold are crucial considerations.

Gold prices tend to rise during periods of geopolitical tension, elevated inflation, wars, and stock market downturns. The yellow metal's performance over the last 20 years was influenced by events such as the Global Financial Crisis of 2008, the Covid-19 pandemic, and the Russia-Ukraine war. While some experts remain bullish on gold's long-term prospects, recommending allocations above 20%, most suggest a prudent 10-20% exposure.

Financial advisors emphasize that equities, representing ownership in productive businesses, have historically delivered superior real returns over longer investment horizons of 25-30 years. While gold offers defensive appeal, increasing its allocation beyond 20% may compromise growth potential. Ultimately, an investor's personal goals and time horizon should dictate gold allocation, not short-term market fluctuations or emotional responses to rallies.