Addition of Gold to Diversify Balanced Asset Portfolio

The low volatility of gold, in comparison with equities makes it a safe investment with minimum downside risks.

SEATTLE (Scrap Monster): Gold and silver have been traditionally accepted in India as physical assets, with its significance in connection with weddings and religious occasions. These precious metals are regarded as financial assets across the globe, providing diversification to one’s portfolio. Of the two, gold enjoys greater value as a safe haven asset, mainly on account of its low volatility, low correlation to other asset classes and its high utility value.

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The low volatility of gold, in comparison with equities makes it a safe investment with minimum downside risks. It exhibits very low or even negative correlation with risk assets such as equities. For instance, gold tends to rise in the event of a fall in equity markets. Moreover, the inherent value of gold makes it a metal of high demand among investors, even during worse times.

Silver has been mainly driven by industrial demand and its consumption in the form of jewellery and silverware, in addition to being an investment tool. Interestingly, it has exhibited positive correlation to equities in India, unlike gold. The volatility of silver has been much higher when compared to gold.

In short, in a portfolio with balanced allocation to both equity and fixed income, the addition of gold could offer healthy diversification.

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