The Modern Gold Rush: Part II - The Art of the Mix – How Much Gold is Too Much?

The Role of Gold: Insurance, Not Growth

The most common mistake investors make is viewing gold as a wealth-generating engine like stocks. While the recent rally in gold suggests it was a good investment opportunity, in reality, gold is usually viewed as a portfolio insurance. Its primary role is to provide stability when other assets (like equities) are failing.

• Negative Correlation: Historically, gold prices often move inversely or independently to stock markets. When fear grips the market (wars, pandemics, recessions), investors flee to safety, driving gold prices up. This cushions the fall in your equity portfolio.

• Purchasing Power Protection: Over ultra-long periods (decades), gold preserves purchasing power against inflation, whereas cash loses value.

Defining the Allocation:

There is no one-size-fits-all number, but the general financial planning principles suggest the following framework based on risk profile:

• The 5-10% "Safety" Allocation: For most retail investors, holding 5% to 10% of the total portfolio in gold is sufficient. This amount is large enough to offer a hedge but small enough that it doesn't drag down the overall portfolio returns during equity bull runs.

• The Aggressive 15% Cap: Conservative investors or those nearing retirement might increase this to 15% to reduce portfolio volatility. However, allocating more than 15% to commodities is generally ill-advised because commodities do not generate cash flows (dividends or interest). They rely entirely on capital appreciation.

• The Tactical Allocation: This is strictly for investors who have a good grip on the global macro-economic scenario. In periods of greater uncertainty, the demand for precious metals like gold, and therefore its price, increases. Hence investors foreseeing greater uncertainty may decide to modify their allocation to gold tactically based on the level of global macro-economic uncertainty.

The Silver Sub-Allocation: Silver should not replace gold; it should complement it. A standard approach is to allocate 20% of your precious metal bucket to silver.

• Example: If your total portfolio is ₹10 Lakhs and you want a 10% exposure to precious metals (₹1 Lakh), you might hold ₹80,000 in Gold and ₹20,000 in Silver. This limits the volatility impact of silver while keeping exposure to its industrial upside.

For a high-risk investor, silver can also form part of his/her satellite allocation to high-risk ‘Trading/Speculation’ portion.

The Logic of Rebalancing

Asset allocation is not a "set it and forget it" decision; it is a dynamic process. Gold often moves in sharp bursts followed by long periods of stagnation. This necessitates Rebalancing.

Scenario A: The Bull Run (Booking Profits) Imagine you started with a 50:50 allocation between Equity and Gold. Suddenly, Gold rallies 40% due to geopolitical tension, while Equities stay flat. Your portfolio is now skewed, perhaps 40:60.

• Action: You must sell the "excess" gold gains to bring the allocation back to 50:50. This forces you to "buy low" (equities) and "sell high" (gold) automatically, without letting emotions drive the decision.

Scenario B: The Stagnation (Accumulation) Conversely, during a multi-year equity bull run, gold might underperform, shrinking to just 3% or 4% of your portfolio.

• Action: This is the signal to top up your gold investment to bring it back to the target 10%. This ensures you are buying gold when it is "cheap" or neglected by the market.

Multi-Asset Allocation Funds: The Automated Solution

For investors who find the math of rebalancing tedious or want to leave it to the experts, Multi-Asset Allocation Funds are an efficient alternative. These mutual funds have a mandate to invest in at least three asset classes (usually Equity, Debt, and Gold/Silver).

• The Professional Edge: The fund manager dynamically alters the allocation based on valuation models. If gold looks overvalued relative to history (or using other methods), they reduce exposure. If equities look cheap, they shift money there.

• Tax Efficiency: Many of these funds maintain >65% gross equity exposure (using arbitrage) to qualify for Equity Taxation (12.5% LTCG after 12 months), which is more favourable than the pure debt taxation that historically applied to Gold Funds. This makes them a highly tax-efficient way to hold gold.

However, it needs to be noted that Multi-asset Allocation Funds usually allocate only a satellite portion of their holdings to gold (as of 31 January 2026, the average gold % held by a Multi-asset Allocation Fund was ~13%, while the maximum gold % at 31.7% was held by Samco Multi-asset Allocation Fund).