Gold is a highly effective portfolio diversifler due to its low to negative correlation with all major asset classes. Over the last 20 years, gold has shown no statistically significant correlation with equities. The fundamental reason for this lack of correlation is that the factors driving gold price are not the same as the factors that determine the returns on other assets. Obviously, there are some economic factors that influence the performance of all investments. But, equally obviously, changes in gold supply and demand have no influence over the other asset classes.As a rule, gold shows no statistically significant correlation with mainstream asset classes. However, there is evidence that when equities are under stress, in other words when shares are falling rapidly in value, an inverse correlation can develop between gold and equities.
Gold holds its own in any investment evaluation as a hedge against inflation, value in the event of political uncertainties and its tradition- Future gold demands
Global demand for gold is 1,000 tonnes more than supply. With no new mining capacity coming through, most of the gold is being recycled, inflationary pressures in the world economy are positive drivers of gold prices. The central banks of Russia, China and West Asian countries are giving strong buying support to gold prices.
Performance in the recent past The average return per year from 1995 to 2008 of gold has been about 12.69 per cent. in contrast, the return of the BSE Sensex over this period was 23.05 per cent and that of bank fixed deposit was 9.35 per cent. interestingly the average inflation was 5.24 per cent.
The rise in gold price in the recent past, say, over the last five years since 2003, has been noteworthy. in 2003, gold price was around Rs 5,800 (per ten grams). By 2006, it had reached about Rs 9,000. in October 2008, it stands at Rs 13,000 plus.
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