With gold delivering an 18 per cent CAGR (compounded annual growth rate) in the last three years, many investors have been wondering if they should move a big chunk of their portfolio to gold. If a ‘safe haven’ can deliver an 18 per cent return, why bother to invest in anything else? Especially fixed income assets like government securities or bonds which only give you 7-8 per cent?
Such ideas show the extent to which investors are influenced by recency bias. Gold is a volatile asset that performs best during times of great uncertainty and global turmoil. Before making any investing decisions, it is important to understand how gold behaves in normal times, when there’s no crisis.
We ran a rolling-return analysis on gold prices (in India, in rupee terms) over the last 25 years and compared this to a gilt fund and a bond fund (picked randomly for a 25-year record). Here are the takeaways.
More swings than bonds
Many Indians believe that gold prices move only one way – steadily upwards. This is simply not true. Gold is a volatile asset with sharp two-way swings.
A rolling-return analysis of gold between March 2000 and March 2025 shows that gold averaged a one-year return of 13.3 per cent in this period. The gilt fund averaged 8.6 per cent. The bond fund (which invests in highly rated corporate bonds and gilts) delivered 8.5 per cent.
This shows gold to have higher return potential. But an arithmetic average can hide extremes. Gold returned a 65 per cent gain in its best year, but suffered a loss of 15 per cent in its worst year. The gilt fund gained 27 per cent in its best year and lost 11 per cent in its worst year. The corporate bond fund contained losses at 6 per cent in its worst year, while delivering a 23 per cent gain in its best year.
These swings in annual returns are reflected in a high standard deviation for gold (standard deviation measures the average swing from the mean). While gold had a standard deviation of 14.4 per cent in its yearly return since 2000, the bond fund had a standard deviation of 3.7 per cent and the gilt fund 6.4 per cent.
Therefore, if return volatility unsettles you, gold cannot be a big allocation in your portfolio. Bonds are a better fit.
More frequent losses
Many folks think that investments in gold are truly “safe”. That is, you can never make a capital loss from investing in gold. Data show that gold frequently makes yearly losses and sometimes even if held for five years.
Gold had loss-making years about 19 per cent of the time between 2000 and 2025. Loss-making years were far less frequent for bond funds, at 1 per cent of the time. Gilt funds had 7 per cent loss-making years.
Gold can deliver losses even over long holding periods such as five years. From 2000, there has been no five-year period when the gilt fund or bond fund delivered a loss to investors. But gold delivered losses about 5 per cent of the time for investors who held it for five years. For instance, between December 2012 and December 2017, gold investors took a 7 per cent capital loss despite holding for five years.
Can undershoot inflation
Most folks invest to do better than inflation. Therefore, it is important to assess how often an asset beats inflation. India’s long-term average inflation is about 6 per cent.
Bond funds pass this test better than gold. If held for five years at a time, gold delivered less than 6 per cent returns about 17 per cent of the time. But bond funds undershot 6 per cent only 1 per cent of the time. Gilt funds were less reliable than gold and delivered less than 6 per cent about 23 per cent of the time.
But to be fair, if you are looking for high returns of 12 per cent plus, bond or gilt funds have been a poor substitute for gold. Over five-year horizons, gold managed a 12 per cent plus return a good 59 per cent of the time. But bond funds never got to the 12 per cent mark over five-year horizons and gilt funds made it about 5 per cent of the times.
Takeaway
What all this tells you is that gold is not a “safe” asset that guarantees capital protection. Nor is it an asset that delivers steady returns from year to year. Unlike bonds, all returns on gold come only from price appreciation. It may not deliver any returns at all for long periods, when there’s no crisis. But when other assets like stocks or bonds are in distress, gold delivers blockbuster gains and acts as a great portfolio shield.
It can be quite difficult to predict in advance when earth-shaking events will occur. This is why the best strategy to invest in gold is to do a long-term SIP (Systematic Investment Plan) in gold funds or ETFs over long periods to average your buy price. The allocation to gold cannot be more than 10-15 per cent of your portfolio given its inability to beat inflation a lot of the time. It also cannot replace bonds which deliver a 6-10 per cent return at all times to Indian investors.