As I tried to answer this question, I realize the answer has to be different for different people with different mindsets.

Let me start a series on this.

To start with, I will try to address this Q for someone whose current thinking is:

I believe equities and bonds / fixed deposits are “performing” instruments and Gold is an “unproductive” instrument.

Inflation angle

You are probably looking at all your investment portfolio from the lens of what returns they give you. From this lens, measuring “Real Returns” is an angle you may have to consider additionally. When it comes to fixed deposits / bonds, it is true that you are guaranteed interest, but when you consider inflation, what are the real returns? 

First things first, you are looking at fixed deposits / bonds other than equities, because you understand you need to balance your portfolio for volatility (only equity portfolio can result in losses if your liquidity event comes unannounced and due to volatility, you may have to prematurely encash your equity portfolio)

From the same lens of asset allocation, consider inflation – consider Gold more like an insurance against inflation rather than looking at it from a “performance” angle.

!! Why do large funds switch between US Treasuries and Gold depending on Interest rates and inflation, and why can’t individuals have same outlook – decide on allocation to Fixed Deposits / Bonds vs Gold depending on Interest rates and inflation? !!

~ When you consider inflation, Gold helps optimize Real Returns of your portfolio.

Currency devaluation angle

All your investments might be in INR, your equity portfolio gave you 125% returns in 5 years, but INR went down 20% against USD in the same period. In dollar terms, your returns are that much less.

While Gold in USD may have a growth path, for someone holding their investments in INR, the 20% is an additional return they would get compared to the Gold performance internationally in those 5 years.

If one of your investment goals was to save for your child’s education and you are considering international education OR you have plans to shift abroad after some years, does having a portion of your investment guarding against currency devaluation make sense?

!! Why do Central Banks of various Governments maintain Gold Reserves, and why can’t individuals have same outlook – balance the currency devaluation risk with Gold savings? !!

~ Gold hedges your portfolio against currency devaluation risk.

Crisis angle

During crisis events like wars, COVID, economic instabilities / scams etc, Gold has consistently shown negative correlation to equities. As in, as equities dropped during such times, Gold price went up significantly.

For this reason, instead of using the term “unproductive”, I would rather term Gold as “Liquid Wealth”. It is not just an instrument for returns. It acts as storage of value because of its low volatility and that is the very reason why it is considered as ‘Wealth’ as against a financial instrument. This is probably true with all real assets that are ‘scarce’ like Real Estate, Gold. However, compared to Real Estate, Gold is highly liquid – in fact liquid across internationally. It is a hedge against the “productive” instruments like equity and bonds. In other words, because of the “real” nature of Gold, it ensures your “Real returns” are optimized.

!! Why do Central Banks accumulate Gold Reserves during crisis events, and why can’t individuals have same outlook – cushion equity portfolio with an allocation to Gold so that during crisis, the shock is absorbed? !!

~ Gold performs well during crisis, protecting your wealth. Gold acts as Liquid Wealth.