“The world’s central banks and the International Monetary Fund still have vaults full of bullion, even though currencies are no longer backed by gold. Governments hold on to it as a kind of magic symbol, a way of reassuring people that their money is real.”
– James Surowiecki, American Journalist
Humans have valued gold all throughout history. The first recorded instance of gold usage goes back to 4000 BC. By 1500 BC, gold had become the recognized standard medium of exchange for international trade. This association of money with gold has 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.
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. The share of gold in the total foreign exchange reserves of India has increased from about 5.88% at end-September 2021 to about 7.01% at end-March 2022 to about 7.81% at the end of March 2023. Not just RBI, but other central banks across the world have also been increasingly buying gold. Central bank gold purchases in 2022 were at a 7-decade high!
This trend has continued into 2023, with Central banks accumulating gold at the fastest pace on record in the first two months of the year.
So why are Central Banks, especially from emerging markets, buying so much gold? A World Gold Council survey, amongst Central Banks from both advanced and emerging markets, regarding factors affecting the Central bank’s decision to hold gold, throws light on the possible reasons.
The case for Gold as an asset class
As reiterated earlier as well, a portfolio that includes both equity and gold is an efficient way to achieve capital protection and create wealth in a sustainable fashion. The performance of gold will offset the poor performance of equities during unfavourable macro events or persistently high inflation.
The Equity & Gold smallcase includes 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.
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 prove that for investors seeking 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.
Check out the Equity and Gold smallcase
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