Gold to Gold Standard

Today, one of the most important topics in investment discussions is the performance of gold and what investors should do at this point in time. To set the context, gold has been on a tear, delivering about 48 per cent YTD returns as of September 30, 2025, the highest calendar return in the last 45 years. Its 10-year CAGR stands at around 13 per cent, which is quite close to the S&P 500’s 14-15 per cent CAGR. In comparison, the performance CAGR of many emerging markets, including Indian markets, is around 12 per cent, significantly lower than both gold and the S&P 500.[EasyDNNnews:PaidContentStart]

The major drivers behind this rally are a weakening U.S. dollar, record central-Bank buying (particularly from Russia, China, and India), persistent geopolitical risk, and renewed inflows into gold ETFs, all of which have contributed to sustained price momentum. The recent Fed policy rate cuts have further propelled this rally, marking seven consecutive weeks of gains. This reflects strong underlying momentum in the asset. As allocators of capital, the key question now is, where are we in the cycle in terms of news flow and performance?

Over the last 2–3 years, the news flow has been overwhelmingly positive, from the Russia-Ukraine conflict to shifts in U.S. administration policies, creating an unprecedented level of uncertainty that has benefited gold. In the past two years, gold has gained nearly 100 per cent. This sharp rally has created tremendous wealth for gold-mining companies, whose operating margins have expanded from low double digits to above 30 per cent, and ROEs now exceed 30 per cent, reflecting cyclical highs in profitability and returns.

However, given this sharp move in both gold and gold equities, the trade has now become consensus and welldiscovered. While momentum remains strong, the risk–reward has become less attractive compared to two years ago, when forward returns were much higher. In this context, it makes sense for investors to gradually reduce exposure to both gold miners and gold itself, locking in gains and reallocating capital to areas where the risk–reward equation looks more favourable. Since this capital is being released from gold, an asset class known for liquidity, longevity, and resilience during macro shocks, it is essential to redeploy it into assets or stocks that carry similar qualities, ensuring that the overall portfolio quality remains intact.

Potential areas for reallocation
■ MNC/quality-focused funds: These have underperformed over the last four-year cycle, while cyclical and government-capex beneficiaries did exceedingly well. MNCs and high-quality companies with long-term track records of steady growth in sales, profits, cash flows, and dividends typically have lower beta to macro shocks due to their entrenched moats and debt-free balance sheets.
■ Banking funds or ETFs: The ROE and margin cycles appear to be bottoming out, while valuations remain attractive. With an improving macro-outlook, credit growth is expected to rise from low teens to mid-teens, supported by stable margins and benign credit costs.
■ Large blue-chip stocks: Stocks within the Nifty 50 that have 10+ years of consistent business performance, superior ROEs, debt-free balance sheets, and currently trade at 4–5 per cent free cash flow yields offer a compelling combination of quality and value.

The gold standard of investing
As capital allocators, we must continuously move capital from areas where ideas have become consensus and past returns are strong, towards areas that are currently out of favour but have long-term potential for both intrinsic growth and valuation rerating. This disciplined rotation, rooted in first-principles investing, is the true gold standard of wealth creation—one that has stood the test of time. As Warren Buffett aptly reminds us: ‘Be fearful when others are greedy.’ This wisdom applies perfectly to today’s gold trade, helping investors preserve and grow their wealth sustainably. Happy Learning and Investing!

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