smallcase in focus: Equity & Gold smallcase

The desire for gold is not for gold. It is for the means of freedom and benefit

~ Ralph Waldo Emerson

History of gold goes back to as early as 4000 BC. A culture, centered in what is today Bulgaria in Eastern Europe, used gold to fashion decorative objects. 

By 1500 BC, gold had become the recognized standard medium of exchange for international trade. The Shekel, a coin weighing 11.3 grams of gold, became a standard unit of measure in the Middle East. Association of money with gold continued into modern times as well. After the end of the 2nd world war in 1945, 44 countries came together to create the Bretton Woods monetary system. Under this system, the value of the US Dollar was pegged to the price of gold. Other countries were required to peg the value of their currency to the value of the US Dollar.      

While gold coins are not official currencies anymore and the Bretton Woods system has long been scrapped, Central banks around the world continue to keep a portion of their liquid reserves in gold. As of March 2022, 7% of India’s foreign exchange reserves or USD 42.5 bn is held in gold.   

So of the 118 elements in the periodic table, why have humans valued gold so much throughout history? Unlike other elements, gold is an inert element and not reactive, radioactive or corrodible. It also has a low melting point. It was scarcely available and hence came to be used in jewelry and as such started carrying sentimental value. Another important aspect is that historically the supply of gold has been too rigid due to its limited availability. This and continued demand meant that its price has continued to rise throughout history.   

In modern times, gold has become an essential part of one’s portfolio due to 2 reasons. 

Firstly, gold is a safe haven asset class. When there is turmoil in the market due to macro events and equity markets are facing a lot of volatility, gold as an asset class tends to do well. Hence it is an effective hedge against equities. Hedging is a strategy employed to reduce the risk of adverse price movements in an asset. The approach helps mitigate the losses in an asset / instrument by gains in another investment. This helps  navigate market correction. The below table compares performance of gold against Nifty 50 performance during times of crisis.

Inflation is the rate of increase or decrease in prices over a specific period of time. It indicates how much more expensive or cheaper a particular set of goods and services has become over a certain period, like a quarter or a year. Historically, inflation has impacted returns on equity and gold in different ways. High inflation has generally correlated with lower equity returns. On the other hand, over the long term, gold acts as an efficient hedge against inflation. 

The below table illustrates the performance of Nifty 50 and gold during periods of increasing inflation. We have considered wholesale price inflation for the purpose of below analysis.

A portfolio that includes both equity and gold is an efficient way to achieve capital protection and create wealth in a sustainable fashion. Performance of gold will offset the poor performance of equities during unfavorable macro events or persistently high inflation.  

The Equity & Gold smallcase provides exposure to both equity large cap and gold asset classes via Nifty Bees and Gold Bees in the proportion of 70% and 30%. While the equity portion of the smallcase assists in growing investment, the gold part of the smallcase protects the portfolio from large drawdowns. 

The smallcase has consistently provided better risk adjusted returns compared to returns of equity large cap stocks. 

Drawdown measures the downside risk of a stock / portfolio. Due to the presence of gold in the smallcase, its drawdown tends to be less than that of pure equity large cap assets. Better risk-adjusted returns and lower drawdowns in all time frames proves that if someone wants to take exposure to large cap equity via the ETFs route, Equity & Gold smallcase is a better option.  

This low volatile smallcase minimizes the risk of market cycles and is suitable for any investor seeking to create wealth over the long term.