Why Gold Deserves a Place in Every Indian Portfolio

Gold has just had its best year since the 1970s. And it's not slowing down.

In 2025, gold surged roughly 65% in dollar terms, breaching $4,000/oz for the first time in October, and ending the year near $4,550. It has continued climbing into 2026, crossing $5,250 as of late February. In rupee terms, 24-karat gold now trades above ₹1,61,000 per 10 grams — more than double its price from just three years ago.

For Indian investors sitting in equity-heavy portfolios, this isn't just a headline to skim past. It's a structural shift that demands attention — and possibly action.

This piece examines three questions: Why does gold belong in a portfolio? What's driving the current rally? And what is the most tax-efficient way to own gold in India today?

Part I: Gold's Job in Your Portfolio

Gold is frequently misunderstood. It's not a growth asset. It doesn't generate cashflows, pay dividends, or compound earnings. So why own it?

Because gold does something that no equity or fixed-income instrument does reliably: it tends to rise when everything else falls.

The Diversification Argument — in Numbers

Over the past two decades, gold (in INR) has delivered a CAGR of approximately 13–14%, which is remarkably competitive with the Nifty 50's roughly 14–15% CAGR over the same period. But the real story isn't the return — it's the path.

Gold's real edge shows up during equity drawdowns. Consider these episodes:

The pattern is consistent. Gold doesn't always go up when equities go down, but over meaningful drawdown periods, it has reliably provided a counterbalance. This is its job — not to beat equities in a bull market, but to protect your portfolio when equities stumble.

The Key Insight: Gold's correlation with Indian equities over the last 20 years has been near zero, and during crisis periods, it turns negative. This makes it one of the very few genuinely diversifying assets available to Indian investors — alongside sovereign bonds and perhaps international equities. For INR-denominated investors, the rupee depreciation tailwind further amplifies gold's protective power.

Why Gold Works for Indian Investors Specifically

Indian investors face a unique structural reality: the rupee has depreciated against the dollar at roughly 3–4% per year over the past two decades. Since gold is a dollar-denominated global commodity, Indian investors get a built-in currency kicker on top of the global gold return. A 10% move in gold globally often translates to a 13–15% move in rupee terms.

This is why gold in INR has rarely delivered negative 5-year rolling returns — the currency depreciation backstop smooths out even the weak patches in dollar gold.

Part II: What's Driving Gold Right Now

The current gold rally isn't a speculative froth or a single-factor event. It's a convergence of structural forces that began in 2022 and have only intensified.

1. Central Bank Buying — The Tectonic Shift

This is the most important demand-side development in gold markets in decades. Since 2022, central banks globally have purchased over 1,000 tonnes of gold annually for three consecutive years — roughly double the pre-2022 average of 400–500 tonnes per year.

The Reserve Bank of India has been particularly active. RBI's gold reserves now stand at a record 880 tonnes, up from roughly 760 tonnes at end-2023. Gold now accounts for approximately 15.6% of India's total forex reserves, up from 8% just two years ago. The RBI has also repatriated approximately 100 tonnes of gold from overseas vaults to India, signalling a strategic shift in how it views the metal.

Why are central banks buying? The consensus explanation points to de-dollarisation. After the US and its allies froze roughly $300 billion of Russia's foreign exchange reserves in 2022, central banks across the developing world understood a new reality: dollar reserves can be weaponised. Gold cannot be frozen, sanctioned, or seized. It's the only reserve asset with no counterparty risk.

2. Geopolitical Uncertainty — A Multi-Year Theme

2022: Russia-Ukraine war; Western sanctions and reserve freezes.
2023–24: Middle East conflict escalation; US-China tensions; election uncertainty across major democracies.
2025: Trade war escalation — blanket US tariffs on China, Canada, Mexico, EU. Gold surges 65%.
2026 (YTD): US-Iran tensions intensify; US Venezuela intervention; DOJ opens investigation into Fed Chair; gold breaches $5,250.

Each of these events, individually, would support gold. Together, they've created an environment where institutional and sovereign investors view gold as a necessary portfolio hedge, not a speculative bet.

3. Monetary Policy & Real Rates

Gold traditionally performs best when real interest rates (nominal rates minus inflation) are low or falling. With US inflation remaining sticky around 3% and markets now pricing in 2–3 Fed rate cuts in 2026, the real-rate environment is increasingly supportive for gold. Lower rates reduce the "opportunity cost" of holding a non-yielding asset like gold.

4. ETF and Investor Demand Resurgence

After years of outflows, gold ETFs globally have seen significant inflows. J.P. Morgan expects approximately 250 tonnes of ETF inflows in 2026. In India, gold ETFs recorded monthly inflows of ₹20+ billion in mid-2025, as retail and institutional investors shifted towards gold amid equity market correction.

5. The Dollar Weakening

The US dollar index has been on a weakening trend as fiscal deficits balloon and US policy unpredictability increases. A weaker dollar is mechanically supportive for gold, which is priced globally in dollars.

Where is gold headed? Goldman Sachs recently raised its end-2026 gold target from $4,900 to $5,400/oz. J.P. Morgan sees gold pushing towards $5,000 by Q4 2026, with $6,000 a possibility longer-term. These are projections, not certainties — but they reflect the institutional consensus that the structural tailwinds for gold are far from over.

Part III: How to Own Gold in India — A Tax Comparison

Indian investors today have more ways to access gold than ever before. But each route comes with materially different tax treatment, costs, and trade-offs. Understanding these differences can mean a meaningful difference in post-tax returns over a 5–10 year horizon.

Here is the current tax framework as of FY 2025–26 (post-Budget 2026 changes):

* Digital gold platforms may include a spread in buy/sell prices. Note: Indexation benefit on capital gains has been fully removed post-Budget 2024 for all gold investment forms.

Budget 2026 — The SGB Distinction

A significant change introduced in Budget 2026: capital gains tax exemption on SGBs at maturity is now restricted only to original primary market subscribers who hold the bond continuously until redemption. If you bought SGBs from the secondary market (stock exchange), you will no longer get tax-free capital gains even if you hold until maturity. Instead, you'll pay 12.5% LTCG after 24 months — identical to Gold ETFs.

This materially narrows the advantage of secondary-market SGBs over Gold ETFs. Since no new SGB tranches have been announced for FY 2026–27, the primary market route is effectively closed for now.

So What Should You Buy?

For most investors looking for fresh gold exposure in 2026, the practical choice has narrowed to:

1. Gold ETFs — Best for liquid, tax-efficient exposure. 12-month LTCG threshold (vs 24 months for physical/digital/FoFs), traded on exchange, low expense ratios (0.1–0.5%), no GST, no making charges. This is the cleanest route for portfolio allocation.
2. Gold Fund of Funds — Better for investors without a demat account or those wanting SIP-based investment. Slightly higher cost but offers convenience. Note the 24-month LTCG period (vs 12 for ETFs).
3. SGBs from Secondary Market — Still offer 2.5% annual interest, but post-Budget 2026, capital gains are no longer tax-free. Premium/discount to NAV on exchange can vary. Worth considering if you value the interest income.
4. Physical Gold — Cultural and sentimental value for jewellery, but as an investment vehicle, it's the least efficient route. The 3% GST plus making charges (5–25%) create a significant cost drag from day one.

Our Recommendation: For systematic portfolio allocation — which is what we do at Grey Sky Capital — Gold ETFs are the optimal vehicle. They offer the tightest tracking of gold prices, highest liquidity, lowest holding cost, and the shortest LTCG qualification period at 12 months. For PMS strategies like Smart Core where allocation can change dynamically, the ability to buy and sell ETF units intraday on the exchange is a critical operational requirement.

The Grey Sky View on Gold

We Don't Predict. We React.

At Grey Sky Capital, we don't have a "gold price target." We don't debate whether gold will hit $6,000 or correct to $4,000. Forecasting commodity prices is a fool's errand, and we'd rather leave that to the investment banks.

What we do believe in is price action and systematic rules.

And the price action on gold has been, by any historical standard, extraordinary. When an asset surges 65% in a single year, follows it up with another 12%+ in the first two months of the next year, and is supported by institutional demand flows that show no sign of reversing — you cannot afford to look the other way.

Our Smart Core strategy treats gold as a first-class asset — not a 5% afterthought or a "tail-risk hedge" parked in a corner of the portfolio. Our allocation framework allows 0–100% exposure to gold, dynamically adjusted based on systematic signals. This means:

• When gold's trend and momentum are strong (as they are now), we increase allocation meaningfully
• When gold weakens or other assets present better risk-adjusted opportunities, we reduce or exit entirely
• We don't anchor to a "strategic allocation" percentage that was decided once and forgotten

This is the fundamental difference between a static multi-asset fund (which might hold 10% gold regardless of conditions) and a dynamic, rules-based approach (which responds to what the market is actually doing).

Gold's contribution to Smart Core's drawdown protection has been significant — particularly during the 2024–2026 period where Indian equities have faced persistent headwinds while gold has surged. A static equity-only portfolio would have suffered meaningful erosion. A dynamic multi-asset approach, with the flexibility to lean into gold when the data supports it, has been able to navigate this environment far more effectively.

"The market is the signal. Our job is to listen — not to argue with it."

The Bottom Line

Gold is not a speculative trade. It's not a "fear asset" for doomsday preppers. And it's certainly not something that only matters during a crisis.

Gold is a structurally important portfolio component that offers genuine diversification, a currency-depreciation hedge, and exposure to macro forces (central bank policy, geopolitical risk, monetary debasement) that equity and fixed-income markets cannot replicate.

The current environment — characterised by record central bank buying, geopolitical fragmentation, a weakening dollar, sticky inflation, and anticipated rate cuts — has created what may be the most favourable structural backdrop for gold in a generation.

Whether gold goes to $6,000 or corrects 15% next quarter, the case for a meaningful, dynamic gold allocation in an Indian portfolio is stronger than it has ever been.

The question isn't whether to own gold. It's how much, through what vehicle, and with what framework for adjusting that allocation as conditions evolve.

At Grey Sky Capital, we've built Smart Core to answer exactly that question — systematically, without emotion, and with our own capital alongside yours.

Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Equity investments are subject to market risks. Gold prices can be volatile and may decline. Tax laws are subject to change; consult a qualified tax professional for advice specific to your situation. SEBI Registration No. INP000009694.

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