The 10-year Treasury note yielded an annualized return of 4.6%. This chart compares the historical percentage return of the Dow Jones industrial average with the return on gold prices over the past 100 years. The analysis also illustrates that, for a hypothetical average Indian pension fund portfolio, the optimal allocation to gold is between 6 and 17 percent. According to the report, institutional investors are adopting alternatives such as gold to traditional stocks and bonds in search of diversification and higher risk-adjusted returns.
A key factor for the stability of returns is the fact that the supply of gold has changed little over a period, increasing only about 1.6 percent per year over the past 20 years. The average annual return on gold has been 10 percent since 1981, surpassing India's consumer price index, which averaged 7.35 percent during the period. Gold-backed ETFs offered an additional source of liquidity, as funds listed in India traded at an average of 180 million rupees per day, according to the report. Gold is increasingly recognized as a major investment, as its global investment demand has grown by an average of 14 percent per year since 2001, and prices have increased nearly eight times during the same period, according to the report.
Gold trading volumes averaged 10.3 lakh crores per day last year, compared to OTC spot contracts and derivatives of 5.5 lakh crore, while gold futures traded at 4.6 tons per day on several global exchanges. This indicates that, over the past 30 years, corporate bonds have achieved a return of around 330%, slightly lower than that of gold. Despite recent price volatility, gold has achieved an average return of around 8.87 percent over the past 10 years, comparable to that of stocks and slightly more than that of bonds and commodities. An analysis of investment performance over the past two, five and ten years shows that a hypothetical average Indian pension fund would have achieved a higher risk-adjusted return of 5 percent, 7.5 percent or 10 percent if the portfolio had been allocated to gold.
Gold has the ability to significantly improve the risk-adjusted return of portfolios at various levels of risk and act as a hedge against inflation, he added.