Gold: An Effective Portfolio Diversifier That Can't be Ignored

Trump's protectionist policies, a weakening dollar, geopolitical tensions and the impact of all of this on global growth, has put the spotlight on gold.

In 2025 thus far, gold is up over 27.4% in US dollars and 29.6% in Indian rupees as of 20 August.

Equities, on the other hand, have posted tepid returns - the Nifty 50 index is up 5.6% and the Dow Jones Composite Index is up 5.2% as of 20 August 2025.

Gold demand is up 3% year-on-year (YoY) to 1,249 tonnes in June quarter of 2025 and is up 45%, in value terms, to US$ 132 billion (bn).

The World Gold Council (WGC) data shows that the investment demand is coming from gold ETFs led by North America, Europe, and Asia.

Gold ETF Flows

India too is following this trend with domestic gold ETFs holdings rising to 66.7 tonnes, up 42% YoY.

Similarly, the AUM has surged 88% YoY to over Rs 647 bn. There is a growing preference for gold ETFs - a smart way to invest in gold.

Central banks, too, recognising the risks, are buying gold as part of their strategic reserve management.

In 2024, they bought 1,054 tonnes of gold, and these purchases are expected to continue, making it the fourth consecutive year of massive purchases. This bodes well for gold.

Globally, central bank gold holdings have increased to 36,345 tonnes, with India's reserves at about 880 tonnes.

Even when the US dollar has been strong, it didn't deter central banks from buying gold. They bought it considering the risks.

Thus, it makes sense to include gold as part of your investment portfolio.

Long-Term Uptrend of Gold

Ever since the pandemic, gold has fared well. The secular uptrend exhibited by gold cannot be ignored. In the last decade, gold has clocked a CAGR of 14.3% (as of 20 August 2025).

In times when equities disappoint you, like it did in 2015, 2016, 2018, and 2022, either generating negative or tepid returns, gold would prove its trait of being a safe haven, store of value, a hedge or an effective portfolio diversifier.

This is because of a negative correlation usually shared between equity and gold, which offers a cushion to your investment portfolio.

So, the precious metal serves as a complementary asset that reduces portfolio risk and improves the overall risk-adjusted returns.

Going forward, if the US Federal Reserve cuts interest rates (succumbing to the pressure of US President Donald Trump), gold may rise even more. This is because, usually, low interest rates support the investment demand for gold.

India's Gold Imports Have Reported an Uptick

India's gold imports, following three months of decline, have reported an uptick. In July 2025, at US$ 4 bn, gold imports surpassed the monthly average imports for the first six months of 2025 (US$ 3 bn) and were up 14% YoY, according to the WGC.

With the festive season ahead, gold jewellery firms are foreseeing strong buying interest and a noticeable pickup in orders from both large chain stores and independent retailers.

Also, as per the WGC, the investment demand for physical gold, i.e. bars and coins, is healthy. Overall, this is positive for gold as an asset class.

How Should You Invest in Gold?

Gold ETFs are by far a smart way of investing in gold, as opposed to buying physical gold.

Gold ETFs are passively managed mutual funds and make direct investments into gold. The units of gold ETF purchased by you are backed by 0.995 fineness of physical gold by the respective fund house, and 1 unit of gold ETF is equivalent to 1 gram of gold.

Their investment objective is to generate returns in line with the domestic price of gold. When gold appreciates, the net asset value (NAV) of gold ETFs goes up, and vice versa. If you have a demat and trading account, it makes sense to consider the gold ETFs.

But if you do not have a demat account and want to take the systematic investment plan route, then the gold savings funds may be considered.

They function like a fund of fund scheme that invests in the underlying gold ETFs, which benchmark their performance against the price of physical gold.

In other words, a gold savings fund invests in gold ETFs. So, the portfolio of a gold ETF becomes the portfolio of a gold savings fund.

It would be sensible to allocate around 10-15% of your investment portfolio to gold with a long-term view (5 to 10 years) by assuming moderately high risk.

Unlike financial assets, gold is a real asset. It does not carry credit or counterparty risk and may serve as a diversifier in your portfolio.

Be a thoughtful investor and don't ignore gold.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a recommendation and should not be treated as such.