Gold is as risky as equity and not a debt instrument!

A reader insisted that gold is a “safe ” instrument and should be considered part of a portfolio’s fixed income or debt. Nothing could be further than the truth: Gold is as risky as equity and not a debt instrument! Here is some supporting data.Let us start with the standard deviation of gold, equity* and 10Y gilts over the last 1,2,3,4,5,6,7,8,9,10 and 11** years. The standard deviation measures how much daily returns (in this case) deviate from the average daily return over the period considered. The larger the value, the larger the volatility in price.* Nifty 50 is assumed to represent “equity”. The inclusion of mid and small cap segments will only make equity a bit more volatile but does not change the central conclusions of this article** This is an arbitrary choice. Technically, these results are only valid for the period considered but generally represent typical asset class behaviour. See: Charts: Equity vs. Gold. Vs. Debt. Also see: Gold is riskier than Stocks!The standard deviation of gold, equity and 10Y gilts over the last 1,2,3,4,5,6,7,8,9,10 and 11 yearsNotice how gold and equity have similar volatilities well above that of gold. This proves that gold is as risky as equity and not a debt instrument!There is more than one way to define risk. Now let us consider the maximum fall over the last 11 years and how long the indices stayed “underwater” (below a previous maximum). The maximum gain and its corresponding period are also shown (an asset class that loses big also tends to gain big).Gold-London AM (INR)Maximum Drawdown Start 28-Aug-13Maximum Drawdown End 31-Jul-15Maximum Gain 106.7476 (12-Aug-2013 To 02-Aug-2024)Maximum Drawdown -32.3294NIFTY 50 – TRIMaximum Drawdown Start 14-Jan-20Maximum Drawdown End 23-Mar-20Maximum Gain 178.4847 (12-Aug-2013 To 09-Aug-2024)Maximum Drawdown -45.8201Crisil 10 Yr Gilt IndexMaximum Drawdown Start 03-Sep-17Maximum Drawdown End 22-Feb-18Maximum Gain 72.1776 (12-Aug-2013 To 09-Aug-2024)Maximum Drawdown -6.5275The drawdown for gold and equity are comparable, while that of gilts is much lower.A standard deviation considers both positive and negative deviations from the average.  Some analysts like to consider “downside risk”. That is, only the negative deviation alone. I am not a big fan of this, as the positive and negative deviations are joined at the hip.For what it is worth, the downside risk of gold, equity and 10Y gilts over the last 1,2,3,4,5,6,7,8,9,10 and 11 years is shown below.downside risk of gold, equity and 10Y gilts over the last 1,2,3,4,5,6,7,8,9,10 and 11 yearsAgain, equity and gold have comparable downside risks, while gilts are a cut lower.One can also define a downside probability:  = Total number of negative returns in a period/ Total number of returns in a period.downside probability of gold, equity and 10Y gilts over the last 1,2,3,4,5,6,7,8,9,10 and 11 yearsAmusingly, gold has more negative returns (in the periods considered), while equity and gilts are comparable.In summary, do not assume gold is a “safe” instrument. 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